News from the Tennessee Valley Columnists
MONDAY, JUNE 4, 2007

Dave Ramsey

Self-employed musicians want to invest in SEPP IRA

Dear Dave: My wife and I are self-employed musicians, and we netted about $70,000 last year. I just cashed out a bad variable life insurance policy, and I’m thinking about putting that money — about $16,000 — into a Simplified Employee Pension Plan. Can you tell me a little about them? — Roger

Dear Roger: With a SEPP, you can put in up to 13.8 percent of your business’s net profit. This is tax-deductible, and it grows tax-deferred. This means you won’t have to pay taxes on the growth until you pull the money out — just like the old IRAs or a 401(k). That’s why they got the nickname “SEPP IRAs.”

Considering that your net income was $70,000, you won’t be able to put the entire $16,000 into one this year. So you should first fully fund a Roth IRA — because it grows tax-free — and put the balance in a SEPP. As always, use good growth stock mutual funds with at least a 10-year track record to fund both of these. The SEPP will also require that you put the same percentage into your employees’ accounts if they have been with you three of the last five years. So the SEPP is the most advantageous for small businesses with few or no employees. — Dave

Bankrupt company

Dear Dave: I’m trying to get a pool put in my yard, and the job is only about 80 percent complete. I called the company about the slow work and got a recorded message saying they’ve filed bankruptcy. I’ve already paid for the work, so what happens now? — James

Dear James: I hate to tell you this, but if they filed a bankruptcy chances are the pool won’t be finished and you’ve lost your money. You’re going to have to find someone else to complete the job and pay them for their work. If the company filed a Chapter 7 bankruptcy they’re out of business. If they filed Chapter 11 bankruptcy — which is a business reorganization — they’re probably out of business, as well. Ninety-seven percent of Chapter 11 filings fail, and even in the ones that don’t the debtor gets to choose whom to repay.

Sorry for the bad news, James. Next time you contract for a project like this make sure you only pay for the work as it gets done! — Dave

Demo car

Dear Dave: I work as a car salesman, and my dealership has a plan where employees can drive a demo. I don’t have to worry about insurance, we pay for gas only on weekends and it costs $120 a month. Maintenance is free, and we get moved to a different car every few weeks. Is this a good deal? — Wade

Dear Wade: This sounds like a very good deal to me. You’re basically renting a car for $120 a month. You can’t operate a vehicle for that kind of money anywhere else. Even if you follow my plan of buying a two- or three-year-old car and letting someone else take the butt-kicking in depreciation, you’re still going lose more than $120 in value a month — even on a great little used car.

You found yourself a really sweet deal here, man. Stick with it! — Dave

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