Individual Retirement Accounts (IRAs) function as personal tax-qualified retirement savings plans. Anyone who works, whether as an employee or self-employed, can set aside up to $5,000 in an IRA in 2008 and in 2009 (indexed for inflation in future years), and the earnings on these investments grow, tax-deferred, until the eventual date of distribution. Persons 50 and over may contribute an addition $1,000 annually. Moreover, certain individuals are permitted to deduct all or part of their contributions to the IRA. As of 1998, certain individuals can also set up Roth IRAs, to which contributions are not deductible, but from which withdrawals at retirement won't be taxed. You can have both types of IRAs but you may only contribute an annual total of $5,000 for 2008 and for 2009 between the two accounts.

Generally, a Keogh Plan is a defined-benefit or a defined-contribution retirement plan set up by a self-employed person or partnership that must meet the same eligibility and coverage requirements, contribution limits, vesting requirements, rules for integration with social security, and other plan requirements, as for any qualified retirement plan covering corporate employees.

A simplified employee pension (SEP) is a written arrangement that allows an employer to make contributions toward his or her own and employees' retirement without becoming involved in more complex retirement plans. The contributions are made to special IRAs (SEP-IRA) set up for each individual qualifying employee.

Before 1963, sole proprietors and partnerships were allowed to have qualified pension and profit-sharing plans for their employees, but the owners of these businesses could not get the tax benefits of the plans because they were considered owners, not employees. The only way to get the maximum retirement benefits for the owner was to incorporate.

Generally, amounts distributed by a qualified plan, minus any nondeductible contributions made by the employee over the years, are taxable to the recipient as ordinary income in the year received.

Employer-provided pension plan benefits may be the second source of your retirement income. You may be getting benefits from a plan you participated in before starting your business, or you may establish on as an employer, to cover yourself as well as your employees.

Depending on your total annual income, a portion of your social security benefit may be subject to income tax. If the total of your taxable pensions, wages, interest, dividends, other taxable income and any tax-exempt interest income plus half of your social security benefits are more than a base amount, some of your benefits will be taxable. Your base amount depends on the filing status on your US tax return Form 1040. The base amount is $25,000 for single and head of household filers and $32,000 for those married filing jointly. These dollar amounts are not indexed for inflation.

Distributions to plan participants or beneficiaries, if the terms of the plan permit, can be made in several ways.

Your social security benefit will be based on the Social Security Administration's record of your earnings. The SSA is required to send an annual Earnings and Benefits Estimate Statement to people:

Your benefit as a wage earner is based on your "average indexed monthly earnings" (AIME). This is a history of your lifetime earnings as it is maintained in the records of the Social Security Administration (SSA).

You have a choice of when to begin collecting your social security retirement benefits. You can take early retirement benefits, normal (full) retirement, or hold off for late retirement. At the earliest, social security retirement benefits can begin at age 62. Normal retirement begins at 65, 66, or 67 depending on the year you were born; or you can wait until age 70. The age at which you begin collecting is one of the factors in determining the amount of your monthly benefits.

When first adopted, social security covered about 60 percent of the work force. Over the years, it has expanded coverage to include the self-employed, many state and local government employees, federal workers, and employees of nonprofit organizations. Today, approximately 95 percent of all workers are covered by social security.

Recently, there has been much political debate and writing about the financial health of the social security system. Based on what you've heard in this debate, you may have complete faith that the system will prevail and be able to continue providing social benefits. Or, you may believe that the system will collapse and fall into complete financial ruin. The role social security will play in your retirement plan depends on your opinions about the system's continued viability and on what action the government takes between now and the time you retire. The Social Security Administration's pamphlet Understanding Social Security reminds us that,

A person who works and pays social security taxes earns social security "credits." In 2008, one social security credit is received for each $1,050 of earnings ($1,000 in 2007; $970 in 2006), up to a maximum of four credits per year. In future years, the amount of earnings needed for a credit will rise as average earnings levels in the country rise. The credits earned remain on the Social Security Administration's records, even if you change jobs or have a period of no earnings.

The purpose of financial planning for retirement is simple — to ensure that you have a financially comfortable retirement. But remember, financial planning is not an exact science. You are dealing with uncertainty and will have to make various assumptions and estimates. These assumptions and estimates can be made based on reasonable and educated judgments about what may happen in the future. As time passes and more information becomes available, you will change your assumptions and estimates and adjust your investment strategy to accommodate the changing environment.

It's never too late, nor too early, to begin planning for retirement. You may have vague dreams about how you want to spend those "golden" years — resting comfortably on a sunny beach, traveling the world to exotic places, writing the great American novel, or catching up on that reading you always wanted to do. These dreams, however, can't materialize unless you actually take the steps necessary to make them a reality. And that requires adequate planning.

The second phase of retirement planning is to estimate the resources you currently have that will provide income to you during your retirement years. You may have heard about the so-called "three-legged stool." What this means is that you will fund your retirement primarily through three main sources.

Generally speaking, the riskier an investment is, the higher it's expected return will have to be in order to entice investors. Determining how much risk to accept in your investment portfolio depends on two broad factors:

An investment plan can be beautiful on paper, but unless you put it into effect it won't help your financial security one bit. This brings us to a truth about investing: for every investor who fails to reach a goal because of making "bad" investments, there are several others who fail because they didn't invest at all. They had a plan that called for making systematic investments over a period of time, but somewhere along the line the planned investments were not made. Setting up an automatic investment plan, whereby you authorize funds to be withdrawn from a checking or savings account periodically for purpose of making pre-determined investments, can be a good way to go. Although some investors may be wary of losing some degree of control over a portion of their income, this can be a way to make sure that you "pay yourself first."

Whether you're a novice at investing money outside your own business, or a seasoned investor, you'll do well to consider your investment goals before you plunk down any money. As is the case with most things in life, it's hard to know what to do — and to evaluate how well you're doing it — unless you have a clear idea of what you're working toward.

The first step in creating an investment plan is to take stock of your current personal financial situation. Make a listing of your assets. This list should include your current financial assets (such as stocks and bonds), cash and cash equivalents (such as CDs), investment real estate and investment collectibles (coins, stamps, etc.). But because the type of investments you should make in the future is also influenced by property holdings that are outside the sphere of what are usually viewed as investments, you should also list your personal assets (such as cars and furniture).

Our discussion of investment planning will set out the basic principles of our recommended process. This process is meant to be as simple and understandable as possible. But because it is a process, it assumes that you will go through certain preliminary steps that focus on your personal situation, goals, and investment preferences before you move forward focus on selecting appropriate investments for you.

The level of compensation you draw from your business will undoubtedly vary widely from time to time due to the ebb and flow of your personal and business needs. And if your business is organized in any structure other than a C corporation, your compensation isn't technically a deduction to the business so it won't be attacked by the IRS. C corporations suffer from the double taxation syndrome, and it is for tax reasons that many small businesses are now organized as S corporations, partnerships, proprietorships or, most recently, limited liability companies (LLCs).

If you are like many small business owners — particularly those just starting out — you have a large portion of your personal assets invested in your business. This may be necessary and advisable now, but as your business develops, it will become prudent to branch out into more general and diverse investments as well. At some point, this will be true even if the additional income to be gained from continued heavy investment in your company would exceed the investment return that you could get on any "outside" investment.

Another way of getting money out of your business at a minimum tax cost is to employ family members and put them on the payroll. This income-shifting technique requires that some justification be demonstrated. You can't just hand out paychecks to relatives who don't actually work for you.