Tax-law changes mean new paper work for the self-employed

Have you been TEFRA-ized? No, you don't have to have some nonstick substance poured all over you. But if you are self-employed, do a lot of free-lance work, or run a small business and have a Keogh retirement account, you'll need to make some changes in it, probably before the end of this year.

All existing Keogh, or HR-10 plans, says Dana Rosenthal, a vice-president at Bank of Boston, will have to be revised to fit the new requirements of the Tax Equity and Fiscal Responsibility Act (TEFRA) of 1982. That law, she says, ''effectively eliminates the Keogh plan. The Keogh has almost become the same thing as the corporate (retirement) plan.''

As a result of several changes in Keogh plans outlined in TEFRA, banks, accounting firms, and brokerages that supervise or give advice on these plans are busy sending out letters to customers and clients advising them of the need to amend their Keoghs. For most plans, these changes will have to be made before the end of this year, or at least by the time 1984 income-tax statements are filed next year.

Although extensions may be granted by the Internal Revenue Service, Keogh plans that are not amended will lose their tax-free status. If you have a Keogh and do not amend it, you will not be able to deduct contributions on income taxes, and any interest the Keogh earns will no longer be tax-free.

Although the effort to amend or rewrite the provisions of your Keogh plan may seem like a lot of bother, there are a lot of benefits, too. For one thing, says Jonathan Flitter, a tax specialist at Touche Ross & Co., the accounting firm, you can now put more money in a Keogh. The maximum annual tax-deferred contribution for self-employed people has been raised from $15,000 to 25 percent of net income, limited to $30,000.

These new guidelines also apply to corporate plans. Here, contribution limits have been lowered from $45,475 to the $30,000 level.

The changes also make somewhat more difficult the decision over whether a self-employed individual or partnership should incorporate. Anyone facing that decision will now have to take into account the fact that retirement plan restrictions are essentially the same, whether or not he incorporates. If an individual does incorporate himself, for instance, the Keogh must be revised to keep it from being ''top heavy.''

Top-heavy pension plans are those that give too large a portion of pension benefits to top executives at the expense of employees on the lower rungs. These plans are illegal.

So another amendment self-employed individuals will have to make in their Keogh is a plan to keep it from becoming top heavy - even if they never plan to have any employees.

''All plans need to have provisions which will protect them from being top heavy in order to qualify,'' says Donald King, tax partner in the Chicago office of Arthur Young & Co., another accounting firm.

In all, there are about a dozen changes in the Keogh provisions, Ms. Rosenthal says, including changes in vesting schedules and early withdrawals. If you have a Keogh and have not yet received a notice from your bank or accountant , you should be getting one soon. Not all banks handle Keoghs, but most of those that do are drafting new prototype Keogh documents, where you just fill in the appropriate blanks.

If you haven't heard from your bank yet, give it a call; there may be some paper work for you to do.

Variable annuities

I have about $100 a month I wish to invest. I am looking for a long-term investment with high return and little risk. A friend of mine has recommended variable annuities. He said such an annuity, bought from a reputable insurance company, would pay competitive interest rates. I've looked at money market accounts, IRAs, and stocks, but I still think an annuity is what I need. What do you think? - R. H. In general, your friend's recommendation is a good one. Variable annuities do pay fairly high interest rates (about 11 or 12 percent these days) that are tax-deferred, and the risk is quite low. If you are planning to use the annuity for retirement savings, it should be used in conjunction with other investment vehicles, like an IRA (individial retirement account), to increase diversification. One advantage of an annuity is the ability to withdraw all funds after 10 years, or when you reach age 591/2, while you must always wait until that age to make IRA withdrawals or pay a penalty.

Because annuities are insurance products, they have mortality guarantees built into them. This means if you outlive the payout schedule, based on your life expectancy, the payments continue as long as you live.

Your friend's mention of a ''reputable'' insurance company is also important. If you are the cautious type, you should stick with a well-known company where insurance is the main thing it does, not a sideline or subsidiary business.

Finally, be sure to look for a ''no load'' product, one that doesn't take a big sales charge off your initial investment. Most insurance companies charge a small fee when you make withdrawals, but this is usually less than you would pay with a ''front end'' load.

Before investing in an annuity, talk to an independent accountant or financial planner to see if this is a good source of tax-deferred earnings for you.

If you would like a question considered for publication in this column, please send it to Moneywise, The Christian Science Monitor, One Norway Street, Boston, Mass. 02115. No personal replies can be given by mail or phone. References to investments are not an endorsement or recommendation by this newspaper.

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