Better routes to retirement

Many truckers, starting out as employees, begin saving money in a traditional 401(k).

“As long as they’re a company driver, it’s out of sight, out of mind,” says Todd Amen, head of American Truck Business Services in Denver. Then the owner-operator bug bites in a big way.

“At least half the time when they buy a truck, they take money out of their 401(k) to buy it, and not realize they’ll pay tax penalties,” Amen says.

The penalty is 10 percent of what you take out, unless you meet certain exemption criteria for hardship or age.

You’re hurting yourself in other ways, too: Not only are you depleting your retirement savings, but you’re eliminating the growth that would occur in those funds over many years.

To set up an individual 401(k), check with a financial institution. You can find a list of almost 100 mutual fund companies that offer plans by going to this site and clicking on Small Business Channel. For more information on the new Roth rules, go to this site and search for Roth 401(k).

For many years, your choices for retirement investing were limited to a few flavors of Individual Retirement Accounts. Two changes, one quite recent, have created some attractive options.

INDIVIDUAL 401(K)s. Until recently, a 401(k) was strictly a plan in which employees contributed part of their paycheck and the employer matched part of it. That changed with a 2001 act that created the individual 401(k), also known as a solo or one-person 401(k). Like an IRA, this allows you to save tax-deferred income. That is, you don’t pay income tax on it until you withdraw it.

It has two other advantages. One is a much higher limit on annual contributions: $44,000 ($49,000 if 50 or older), says Roger Kuehnle, a specialist at the IRS. That beats the $4,000 (or $5,000, if 50 or older) on IRAs.

The other plus is the option of consolidating older retirement accounts into the individual 401(k), says Kevin Rutherford, CEO of The Alliance, an Orlando, Fla., owner-operator financial services firm. “Ten years ago we recommended Keoughs, then we recommended SEP IRAs because the rules were better, then they brought out the SIMPLE IRA and the rules were better, but everybody had to keep the old accounts,” he says. “They couldn’t roll one into another. It’s just kind of messy.” All such accounts now can be combined into an individual 401(k).

ROTH 401(k). Effective only since January, this change creates a potentially huge tax savings. You pay income tax on the retirement savings for the year in which you earn it, but you’re spared tax on all the growth. Given enough years, retirement savings can easily double or triple, creating a sizable cash shelter that is free from Uncle Sam’s greedy paws.

“Tax me on my money now, but never tax me on all my growth because it’s the only way I can possibly get tax-free money,” Rutherford says. “That is by far the best deal.”

This same arrangement has been available through a Roth IRA. Now, the combination of the Roth 401(k) and the individual 401(k) is perfect for owner-operators, especially those with more than a few years until retirement.