TAX-DEFERRED VEHICLES THAT WILL LAST A LIFETIME.

investments to retire by

NATE THOMAS IS NOT QUITE READY TO GO ALL THE way. For 16 years, the semiretired entrepreneur has been operating Quality Impressions, a Durham, North Carolina-based producer of advertising specialty items. Says Thomas: "Im still enjoying [the business], but I've reached the stage where I've cut back a little on the work I do. Now I have to decide whether to sell the company or take in a younger partner."

Whether the vigorous 67-year-old Thomas continues to work or sells his enterprise will be his choice. Unlike many business owners and professionals, he has prepared for his post-employment life, designing options through some rather sharp preretirement moves. For one, he transferred his retirement account from his former employer into a rollover IRA, where his money has continued to grow, tax free, for the past three years. Investing in Janus Worldwide Fund (JAWWX), American Century Income & Growth Fund (BIGRX), Managers U.S. Stock Market Plus (MGSPX), among other mutual funds, he has amassed enough to maintain his current lifestyle when he decides to stop working. While building up the value of his enterprise, he structured a simplified employer pension (SEP) plan, to which he continues to contribute 15% of his income, and, through investments in Deutsche/BT International Equity Fund and Weitz Partnership Value Fund (WPVLX), has the money to enable him to travel. Thanks to a recent federal law that wipes out the "earnings penalty" for workers between the ages of 65 and 69, Thomas is entitled to his full Social Security benefits no matter how much he earns. How much do these benefits come to? Twenty-five percent of his income. (Workers 62 to 64 years of age still face an earnings penalty, however. In 2000, they'll lose $1 of Social Security benefits for every $2 of earnings over $10,080.) So, when Thomas finally stops working, he'll be able to live on his Social Security benefits, proceeds from the sale of his business, and his retirement accounts.

Indeed, Thomas has methodically assembled the building blocks of a bountiful retirement. Unfortunately, too many entrepreneurs and executives don't prepare for the day when they will no longer be full-time members of the workforce. And many of us feel that we will never be ready to make that move: According to a survey conducted by the Savings Education Council last year, 24% of all workers were not confident that they were prepared to retire comfortably.

But you don't have to be one of them. To help you prepare for your golden years, BE offers a basic primer on the tax-deferred vehicles available to you. If used properly, they will provide you with the funds that will enable you to retire in comfort. Some may prove to be more traditional, while others require you to choose hard-working investments for your long-term financial objectives.

* Social Security. OK, we know that you will need more than your Social Security benefits to retire. And while it may not constitute an active investment, folks like Thomas have used these benefits to supplement their income.

The average retiree currently collects $804 per month, or nearly $10,000 per year, while a retired couple will receive more than $16,000 per year. Those individuals, however, who have consistently made the maximum contribution to the system because of high earnings, receive $1,433 per month, or more than $17,000 per year. High-earning couples might receive over $25,000 per year in Social Security benefits. To put that amount in perspective, you'd need to hold more than $400,000 in Treasury bonds paying 6% interest to receive as much in investment income.

* Small-company retirement plans. Popular among both employers and employees, these plans offer tax-deductible contributions and tax-deferred investment buildup. SEP plans and SIMPLE IRAs are among the most common vehicles used by small business owners. Here's how they work SEP plans allow business owners to put more money into their own retirement account than either SIMPLE IRAs or regular IRAs (up to $25,500 in 2000) with the stipulation that they contribute to employees' accounts as well, while SIMPLE IRAs require that they make smaller contributions (no more than $12,000 per year) with optional employee participation and a modest employer-match component. "Generally, the fewer employees, the more attractive an SEP plan will be," asserts Edward Fulbright, the Durham, North Carolina, financial planner who advises Thomas.

* Large-company plans. Most major employers offer 401(k) plans in which employees can choose to defer some of their salary and target those amounts to various investment options such as equity and bond mutual funds. Nonprofit organizations and educational institutions provide similar offerings through 403(b) plans.

* In such plans, contributions are made before taxes, so they will reduce your yearly tax bill, and, unlike small-company plans, large companies, on average, match as much as 50 cents for every dollar. But even though 401(k) plans follow federal guidelines, their structures vary widely. Most employers offer an array of mutual funds to chose from, while some offer you shares in their stock. Some invest the matching contribution in the mutual funds of your choice. Others match contributions only with company stock. Still others let you invest in the stock market with a portion of your retirement dollars. Your maximum allowable contribution is $10,500.

And many plans encourage employees to be proactive. For example, some employees have not only been participants in their employer's 401(k) plan, but they have taken active roles on the committees that administer the plan and have met regularly with the money managers who develop investment offerings.

* IRAs. Everyone who works (plus nonworking spouses) can contribute up to $2,000 per year to an IliA, where investments can grow untaxed. Those contributions will be deductible if you're not covered by an employer's plan, or if you are covered and your income is modest. (For a full $2,000 deduction this year, your adjusted gross income would have to be under $52,000 on a joint return.)

* Rollover IRAs. As many employees shift gears, they may consider parking their employer-sponsored retirement funds in rollover IRAs. "Often, when you leave your employer, you'll have your choice between taking an annuity and rolling over the balance to an IRA," says Leon Walker, a senior partner with Bert Smith & Co., a CPA and management consulting firm in Washington, D.C. "I generally recommend a rollover IRA because you'll have continued tax deferral as well as more flexibility and control. With an IRA, you can decide how you want to invest the money in the account."

Walker says that such a rollover should go directly from your former employer to your IRA. If the distribution goes to you first, 20% of the funds will have to be withheld to cover possible federal income taxes. In that situation, you'll have to make up this amount with your own money to keep the IRA intact. For example, you would have to put $20,000 in the account on a $100,000 rollover.

Norma McCowin is an example of an investor who discovered the benefits of a rollover IRA. The 30-year-old took the money she had accumulated in her previous job's 401(k) plan and rolled it over into an IRA, investing $20,000 in five mutual funds: Federated Communications Technology (FCTEX) and Delaware Select Growth (DVEBX) and a unit investment trust, First Trust-Communications Growth Series 4 (www.nikesec.com), that focuses on such telecoms as Nortel Networks (NYSE:NT), Qualcomm (Nasdaq:QCOM), AT&T (NYSE:T), and MCI WorldCom (Nasdaq:WCOM). "With unit trusts, you know what companies you'll own going in, and there's no turnover during the term of the trust," says Darric Boyd, an associate portfolio manager for Legg Mason in Baltimore. Unit investment trusts are vehicles in which securities are bundled together and then sold in pieces to investors. (See "Putting All Your Eggs in One Sturdy Basket," Moneywise, July 2000.) The other two funds are Legg Mason Value Trust (LMVTX) and The Investment Trust Co. of America (AIVSX).

Adds Boyd, who serves as McCowin's financial advisor: "Her emphasis is on stocks because she's young enough to ride out any short-term corrections. The funds she owns are basically large-cap funds because large companies are generally less risky than small ones, especially in the technology area."

* Roth IRAs. Introduced in 1998, this type of retirement account can be established in two ways. If you are single with an annual income of under $95,000, or married with a combined annual income of $150,000, you can make a non deductible contribution of up to $2,000 per year. The second way is to convert a regular IRA or a rollover IRA into a Roth IRA by paying any deferred income tax. Regardless of the method, all Both IRA withdrawals are tax free after five years and, of course, after you reach 59 1/2 years of age.

McCowin, who has developed a separate investment strategy for her toddler, is currently considering making an IRA swap. "I have advised her to convert her rollover IRA to a BRoth IRA," says Boyd. "She plans to stretch the conversion over four years to spread out the tax bill. Once she converts to a Both IRA, if she keeps the money in [her account] until age 59 1/2, all of her subsequent withdrawals will be tax free. Considering her youth, she may be able to accumulate a tremendous amount of tax-free funds for her retirement."

* Portfolio building. It's never too early to start planning and investing for retirement. Beyond building a source of tax-deferred post-employment funds from Social Security, company-sponsored plans, or IRAs, construct a high-quality portfolio of stocks--individually and collectively. Focus on the long-term, and select equities from the New Economy--Intel (Nasdaq: INTC) and Cisco (Nasdaq: CSCO), for example--as well as from the Old Economy--General Electric (NYSE: GE) and Home Depot (NYSE: HD) are two possibilities--that are market leaders with staying power.

Many investors have used their 401(k) experience to learn about investing and then gone on to develop investment clubs with family members, friends, and colleagues. McCowin's advice to young investors: "No one is going to provide us with the kinds of pensions our parents received. You have to do it on your own, so don't wait to get started."

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Want to keep Uncle Sam from taking a big tax bite out of your investments? Tax-deferred vehicles may be the answer. Here are some taxing matters to consider in order to shelter your wealth:

Social Security is a good way to supplement your retirement income. Currently, the average retiree collects $10,000 per year, and while that's hardly enough to cover your expenses in retirement, every little bit counts.

Company-sponsored retirement plans offer tax-deductible contributions and the investments grow tax-deferred. For those with 401(k) plans and 403(b) plans, contributions are made before taxes, thereby reducing your annual tax bill.

IRAs give investors more options than ever before. Depending on your financial situation and the investment vehicle, contributions are tax deductible, while in other vehicles they are not. In a Roth IRA, for example, contributions are nondeductible, but withdrawals are tax free after age 59 1/2.

--Tanisha Ann Sykes