[The following is a guest post by RateLadder.com. I asked him if he would be kind enough to write an article about the SEP-IRA since he has more expertise in the area than I do. He’s also taking an approach that I though readers would find interesting. If you are interested in peer-to-peer lending, I highly suggest subscribing to his feed]

A Simplified Employee Pension Plan or as it more commonly called SEP-IRA is a retirement plan for self employed and small-business owners. It works much like a normal IRA in that earnings grow tax-deferred.

For those without a 401K with matching (401Ks are prohibitively expensive for small business owners) the SEP-IRA is your best pretax retirement vehicle.

There are a series of complicated rules as to how much can be put into the plan tax deferred, but to make it simple you may deduct from a maximum of $45,000 in 2007 and to make it more complicated depending on your particular situation the amount that can be deducted is between 18.6% and 25% of your income/net profit/W2 wages.

Blah Blah Blah why do I care?

1 word: PRETAX

The pretax portion of the SEP-IRA is what makes it so attractive to non 401K users. By deferring taxes you not only save in cash flow today, but push out the dollar cost of your eventual taxes so that their NPV is significantly less even if you are in a higher tax bracket in retirement. And on top of that you get the value of compounding interest.

I am taking out a loan to fully fund my SEP-IRA. How can this be a good idea? The details are more complicated, but let’s examine the loan request and the ramifications –

Assumptions:
“¢ A loan is required in order to fund the SEP-IRA
“¢ $24K loan 3 years at 10%
“¢ 25% tax bracket now and in retirement
“¢ 30 years to retirement
“¢ 8% account growth rate
“¢ 3% inflation
“¢ 3 loan term not adjusted for inflation (by not adjusting I am imposing a small penalty on the benefits side of the equation).

Costs:
$24,000 = loan principal
$120 = 0.5% loan origination
$3,879 = finance charges
$55,904 = eventual taxes owed
$92,126 = inflation adjustment for future earnings NPV with a 3% annual discount

Total Costs: $176,029

Benefits:
$6,000 = immediate tax savings $24K * 25%
$223,615 = growth of $24000 tax deferred @ 8%
$23,032 = inflation adjustment for future taxes NPV with a 3% annual discount

Total Benefits: $252,647

Benefits ““ Costs = $76,618

You could add all kinds of complicated scenarios, but bottom line is that the origination fee and finance charges over the next 3 years are overcome immediately by the tax savings. And the long term benefits of tax deferred compounding interest make any short term pain from an affordable loan payment worthwhile.

From time to time, I chat with other readers and bloggers. The other day, I had an interesting chat with Steve from Brip Blap. While we chatted about a number of topics, two really stuck through in my mind… blogging and retirement.

For the last two and half months, I have not worked a steady day job. I thought I’d take a shot at staying at home, being a good house husband, and explore ways to make income on the side. Though it takes an extraordinarily large amount of my time, it’s slowly starting to approach a portion of what I made at my day job. I consider myself very fortunate. My health site is lucky to bring in $10 in cash for the month. I suspect this is what many bloggers experience.

Many bloggers recognize this and even go out of their way to spread the message that blogging is not the answer to coping with unemployment. Brip Blap pointed that blogging is “not a road to retiring at age 40.”

I couldn’t help but take a few hours and roll that thought in my head. In the traditional sense of retirement, I have no doubt that it’s true. I’d be hard pressed to convince anyone that I’m going to get to my goal of a 2.25M net worth by blogging. On the other hand, if you are a little liberal with your definition of retirement perhaps it can be a road to retiring at age 40.

When I imagine my retirement, I don’t envision that I’ll stop working. I think I would be missing a higher purpose of making my life mean something – leaving a legacy behind if you will. I took a little time and thought about what my ideal retirement job would include. It would surely have the following:

• Ability to work on projects that I enjoy
• Flexibility to working as much (or as little) as I want to
• Flexibility to when I want to
• Flexibility to work from wherever I want to
• Freedom from having to take orders (which I might disagree with) from others

Take a step back and look at that list. Doesn’t blogging seems to fit as a good retirement job? Is blogging going to be able to bring in enough money and be consistent enough to rely on? If you can answer those two questions in the affirmative, you are on your way to “retiring” in a sense. Right now, I can’t do that, but maybe in a few years I will be able to.

Steve quickly agreed that in some ways, profitably blogging could be considered a form of retirement. However, he noted that his idea of retirement requires investments that are more passive in nature (investments and royalties for example).

It’s hard for me to imagine blogging 35 years from now and beyond. Who knows where technology will take us in that time? I do imagine there will always be money for those willing to share quality ideas and spread their knowledge. Perhaps that’s all I’ve ever wanted to do. As Lloyd Dobbler once said, “I don’t know, I can’t figure it all out tonight.”

[The article below is from Dollar Guides. Dollar Guides is a paid directory of financial resources. I haven’t looked at or used many of those resources and can not recommend them one way or the other.]

As most of us know, your 401(k) is a retirement plan that many employers offer. Simply, part of your earnings is deferred into your 401(k) account. In other words, money that is put into your 401(k) is tax-deferred until withdrawal. Likewise, some of us are also familiar with an individual retirement account, or IRA. However many are not familiar with a Roth IRA. Earnings in a Roth IRA, unlike the 401(k), can be withdrawn after age 59½, tax-free. With this said, many people decide to convert their 401(k) into a Roth IRA. This can be very beneficial, however it is not a simple one-step process.

In short, your 401(k) can be “rolled over” or converted into an IRA, both traditional or Roth. However, in order to convert your 401(k) into a Roth IRA you must first roll it over to a traditional IRA and then to the Roth IRA. It’s basically a two-step process with many different factors involved.

So, what’s the catch? Well, rolling your 401(k) into the traditional IRA is straight-forward. However, once your funds are in the traditional IRA and you wish to roll it into a Roth IRA you must pay taxes on them. This means that if you are in the 15% tax-bracket, and you were rolling $40,000 from the traditional to the Roth IRA, you must pay roughly $6,000 in taxes. So, why do you have to pay taxes at this stage of the roll-over? The answer is simple. When you contribute to a traditional IRA, your contributions are tax-deductible resulting in taxed earnings. On the other hand, when you contribute to a Roth IRA, you are doing so with after-tax dollars resulting in tax-free earnings after age 59½. So the funds contributed, or in our case rolled-over, must be taxed before entering the Roth IRA.

So, why would you consider rolling over the balance of your 401(k) into a Roth IRA when it requires paying taxes on the entire balance? Well, you might expect to be in a higher tax-bracket after the age of 59½. Let’s consider an example:
John Doe is 35 years old and in the 15% tax-bracket. He expects to be in the 25% income tax-bracket at age 60. He is considering converting his balance of $40,000 that is in his 401(k) to a Roth IRA. If he chooses to convert the balance on his 401(k) into a Roth IRA at age 35, then he must pay 15% income tax on the current balance. However, he will not have to pay any taxes at the time of retirement (after age 59½). Let’s remind ourselves that he is only 35 years old, the interest will be compounding for the next 25 years, and most importantly, he can continue to contribute the maximum amount to his Roth IRA each year. If he chooses to keep the funds in the 401(k) account until retirement, then he will be forced to pay 25% income tax on the final balance.

Many people that choose to convert their 401(k) into a Roth IRA use outside funds to pay the taxes on the converted balance. Many often decide to use funds from their savings account. Others simply allow the taxes to be taken out of the converted balance. Either way, converting your 401(k) can be considered for anyone with a 401(k) account. It is important to remember that the income restrictions for a Roth IRA still apply when converting from a 401(k).

In deciding on whether or not to convert your 401(k) into a Roth IRA, it is important to speak with someone you trust concerning your finances. Try to consider all of your options when planning for retirement.

[Editor’s note: I’m not convinced that “most of us” know 401Ks and “many are not familiar with a Roth IRA.”]

Often times, I’m Lazy, but never so much with 401k plans from past jobs I have held. I know I should transfer the money to a Rollover IRA. This would save me money in administrative fees. It would also give me more choice in investments. If I wanted to buy a gold ETF I could. It’s an all-around win – there’s almost no rational not to do it. (I write “almost” there because high-income earners may find that it’s a negative if they plan to convert IRAs to Roths in 2010. This is a sticky situation and to be quite honest, I’m not qualified to opine on it. I suggest you see your tax professional.)

So the question shouldn’t be, “Do I transfer my money from my 401k plan to a Rollover IRA?” It should be, “Which company do I want handling my Rollover IRA. My IRAs are currently being handled by TD Ameritrade. It’s a fine institution, but it’s not one that I chose. They simply bought Datek.com and my account was transferred. They charge a very low $10 commission to buy or sell a stock – or an Exchnage Traded Fund (ETF), which I use. Each year I tend to make one simple transaction. I buy a very diversified index fund ETF with my whole contribution. This means that I only incur the $10 commission once a year. When I sell, years later, I’ll incur another $10 fee (assuming that the fee doesn’t change) for each ETF that I own.

Zecco, under many circumstances, offers stock trades for free. Between free and paying $10, I’ll take free any day. But there’s a catch with IRAs – an annual $30 fee for maintaining your account. Thus the $10 a year that I spend now, would rise to $30. That eats away the savings. However, with Zecco, I could rebalance my portfolio for free throughout the year. I could even designate a few thousand dollars as “play money” and buy the down sector hoping to catch a return-to-the-norm bounce.
I could also be more diversified than I am currently. The only cost of buying and selling would simply be the spread between the bid-ask price, which might not amount to much.

Is this worth the extra money each year?
I think it depends how much money is in the IRA. If you have $500 in an IRA, you aren’t going to want to pay $30 a year in account fees, but if you have $225,000, $30 might seem like a great bargain. When does it become more valuable for me to go with the Zecco account for the advantages there. I’m not sure where the crossover point is. I currently have around $75,000 to transfer, which makes that fee about 0.04% (note that it’s a small fraction of 1%, not 4%) of the whole account. When put that way, it seems like Zecco might be a good value.

At any rate, I’m sure the fees that I’m currently paying in my 401K is many, many times that. It shows once again that I shouldn’t let the pursuit for perfection prevent me from performing positively.

Boston Gal’s Open Wallet asks do you have two times your income saved for retirement? The most interesting part of the article was concept of a crossover point your retirement savings. The crossover point is when you make more from compounding interest than you do from new contributions. This happens when you have two times your income saved.

I had never really thought about it in this way, but it won’t change how I contribute to my retirement. I have about 35 years left until I reach traditional retirement age. I calculate that I’ll make about 5% each year after investment fees, taxes, and most importantly – inflation. Thus, I figure if I put in $15,000 in retirement this year, I will have over $82,000 in buying power at age 66. Next year, I will think of that contribution giving me buying power at age 67. I’m doing better than this because I’ve putting money for my retirement almost ten years ago. The math with each year now translating to one in retirement isn’t exact. Towards the top of the hill, I may find that I can live off the investment gains. I think of this philosophy as building a hill up until the point of retirement. The bigger the hill the longer I can coast down in my retirement.

As for the crossover point, a year ago, I might have been closer, but with the increase in my income over the last year, I fall short. I’m almost exactly at 1X my income. I’ll happily postpone my retirement crossover point party if I can keep increasing my income.