25. HR-10 Plans - Self-Employed Pension

The Code allows self-employed proprietors and partners (no corporations) to establish a tax-sheltered retirement plan. Contributions are deductible from that year's adjusted income and the interest accumulates tax free. HR-10 Plans may be defined benefit plans as well as defined contribution.

With respect to defined contribution plans, an individual may contribute 25% of his or her earned income up to a maximum of $30,000. Earned income is determined after the HR-10 contribution has been made. A special provision allows self-employed persons to deduct the lesser of $750 or 100% of their earned income provided that the adjusted gross income in the tax year does not exceed $15,000. Contributions must be made on behalf of all full-time employees (working at least 1000 hours each year) who have 3 years of service. The formula for making contributions can take into consideration expected Social Security payments but cannot discriminate in favor of the self-employed individual over the common law employees.

The funding vehicles for HR-10 plans include savings accounts, mutual funds, individual annuities, or a variety of qualified group annuity products currently available. A pre-retirement death benefit may be included to guarantee the retirement fund for a beneficiary.

At retirement, the funds may be withdrawn in various ways. One may remove all the funds in a lump sum and employ special 10-year averaging. Guaranteed lifetime annuity income payments or installment payments are
available as well.

Tax reference verification 1-800-829-1040

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