Saving Grace

This story appears in the October 1998 issue of Startups. Subscribe »

Homebased business owners looking toward retirement have an interesting new investment option this tax year--the Roth IRA. Like traditional IRAs, qualified individuals can put up to $2,000 per year in a Roth account. Unlike the typical IRA, however, the Roth IRA permits tax-free earnings and tax-free withdrawals for persons over age 59 1/2 who have contributed to the IRA for at least five years. In addition, Roth IRAs allow penalty-free withdrawals for such expenses as buying a first home and paying for college, although a five-year aging period may apply.

Combined with the SEP IRA for self-employed persons, the Roth IRA is a significant incentive for saving, according to Judith McMichael, vice president of Fidelity Investments in Boston.

"Self-employed individuals must rely on themselves when it comes to retirement savings, and the SEP IRA has always been especially well-suited for smaller businesses, freelancers and independent contractors," she explains. "While we've always recommended that people consider supplementing an SEP IRA or other small-business retirement plan with a [traditional] IRA, the benefits of the new Roth IRA may change the dynamics of this decision for the 1998 tax year."

SEP IRAs allow annual contributions of up to 15 percent of self-employed earnings, with a $24,000 limit; these are higher allowances than those of traditional IRAs. They are also fully tax-deductible, and assets can compound, free of taxes, until they are withdrawn.

Starting this tax year, the Roth IRA allows tax-free earnings and post-retirement withdrawals on contributions of up to $2,000 per year, provided gross income does not exceed $95,000 for single taxpayers or $150,000 for those filing jointly. With Roth IRAs, there is no minimum required distribution at age 701/2, and you can continue to contribute and accrue tax-free assets as long as you earn any income at all.

McMichael recommends self-employed individuals take advantage of both SEP and Roth IRAs to maximize retirement savings. "In deciding which IRA to contribute to first, you'll need to weigh whether the tax deduction [for an SEP IRA] is more valuable now or if the potential for tax-free Roth earnings will be more valuable later," she says. "Generally, the longer you have until you need your assets, the more likely you are to benefit from the Roth IRA's tax-free compounding and distributions. Also, if you expect your future tax rate to be the same or higher than it is today, you might want to consider contributing your first $2,000 to a Roth, and then supplementing that with contributions to an SEP IRA."

Only funds in an existing IRA can be converted to a Roth IRA, so in order to roll funds in a 401(k) or other eligible plan to a Roth, first have them converted into a roll-over IRA. All contributions must be made by the end of the tax year; there are no extensions.

Contact Fidelity at (800) 544-5373 for a free report on retirement options titled "How the New Roth IRA Complements the SEP IRA." Advice and an interactive IRA evaluation tool are available at Fidelity's Web site (http://www.fidelity.com), or go directly to the source at http://www.irs.ustreas.gov

Due Process

Collecting overdue accounts can be a nightmare, especially if customers know you lack clout. Many homebased business owners have discovered that, when it comes to dunning deadbeats, there's strength in numbers.

The National Association for the Self-Employed (NASE) offers members a number of collection options to get customers to pay up, including special discounts on collection services from financial giant Dun & Bradstreet (D&B). For $17, members can get a packet of boilerplate collection letters on D&B letterhead, which tend to get delinquent customers' attention. If that fails to motivate them, NASE also provides discounts on professional collection services from National Credit Systems (NCS)--$20 per delinquent account, with a five-account minimum. NCS contacts delinquent customers up to five times and will assign an attorney to the account, if necessary.

NASE also offers members discounts on other D&B services, including obtaining credit histories on customers and prospects. For additional information, contact NASE at (800) 232-NASE, or visit its Web site at

Dollars & Sense

When it comes to funding your homebased business, it really pays to do your homework. To help, the American Institute for Financial Research (AIFR) offers Smart Business Start-Up, a four-module software package ($149) that features a comprehensive "Financial Advisor" workbook to help you assess your financial needs and find funding.

According to Julie Price of AIFR, the workbook includes chapters on finding small-business financing, steps to take before looking for a small-business loan and the best ways to approach potential lenders, as well as sources of financial help, including SBA programs, and a state-by-state list of small-business investment companies and venture capital clubs.

AIFR's Web site (http://www.sbsn.com) includes additional information on the Smart Business Start-Up package, as well as links to other useful sites for homebased entrepreneurs. Call (800) 791-1000 for more information.

While you're researching funding sources, check out America's Business Funding Directory, the largest Internet search engine matching entrepreneurs with potential funding sources. The best part is that you can use the service for free.

To register, simply complete a short search form at the directory's Web site (http://www.businessfinance.com). In fewer than 75 words, describe your business and the amount and type of capital (commercial or government, commercial real estate, investment or venture capital, or equipment financing) you need.

"Within minutes, the directory provides a list of potential sources," says Candace E. Outlaw, CEO of Business Funding Services Inc., the company that operates the directory. According to Outlaw, the length of your list will vary depending on the funding category you choose. And while someone looking for $500,000 in venture capital might receive a list of 100-plus sources, "it's not a numbers game," Outlaw notes. "We're here to find quality--not quantity--funding sources for small businesses."

The system also provides information about your company and its financing needs to funding sources that subscribe to the system. Outlaw says the response from both funding sources and businesses seeking funding has been excellent. "Since November 1995, approximately 100 member investors have done at least two to three transactions with small companies," Outlaw says. "We assume our subscribers are happy with the service because they all renew."

The Business Funding Directory lists approximately 15,000 domestic and international financial backers by category and more than 30,000 that aren't categorized. The Web site also includes a helpful, downloadable small-business investment workbook.

Check It Out

Sooner or later, writing checks will seem as archaic as churning butter or hanging laundry on a clothesline. The question is when? Already, many major banks offer larger commercial customers limited electronic banking services, but for smaller companies, establishing a computerized banking system can be a headache--hardly worth the time and effort.

Citibank is seeking to change all that with Business Access, a full-service online banking product for small businesses that combines almost all the features of regular banking, with a few extras thrown in for good measure. Using Business Access, sole proprietors and owners of single-stockholder corporations can manage all their financial information--both personal and business--in one place. Of course, the biggest plus is the elimination of the middleman in everyday business banking transactions.

"Business Access' flexible design and unparalleled security and entitlement systems provide businesses, from sole proprietorships to those with hundreds of accounts, with an efficient and convenient tool for managing their resources," says Citibank vice president Gordon Kent.

Using a PC or Macintosh with Windows, DOS or Mac software and a modem, you become your own account manager--making far fewer phone calls and trips to the bank to check the statuses of your accounts. You get immediate access 24 hours a day to see which checks have cleared and how much money you have on hand at any given time. Each time you sign on, Business Access provides current account information that you can print out for recordkeeping, accounting and tax purposes.

You can also monitor and reconcile account information with up-to-the-minute "available" and ledger balances, and view projected funds availability up to 10 days in advance. The service lets you transfer funds between accounts; set up transfers for future dates; send domestic and international wire transfers; make payments or withdrawals for your business credit account; electronically pay bills or request stop payments; and download account information into spreadsheet software for money management forecasting.

The system also provides a security system that you can custom-design; it's available at no cost to business and professional customers. Additional information, including a downloadable demonstration of Business Access, is available at Citibank's Web site (http://www.citibank.com) or by calling (800) 967-2484.