Question:
  I have a question regarding the pros and cons of various retirement plans for the small business.  My wife recently started a small (2-person) business.  A primary goal of the business is to fund my son's college education and secondarily to help fund our retirement. Income for household expenses is not important as we live fine on my income.  The business will probably generate about $100K to be split between the partners, or reinvested.

  I am in my mid 50's and expect to retire in approximately 5 years due to a chronic health problem.  My wife is in her mid 40's.  Our son will enter the 7th grade in September.  We would like to put as much of her income in a tax-deferred account as possible.  Her partner is much younger and will ultimately depend on the business for his income, although he does not at this point.

  Any recommendations?  If I retire at 60  - about the time my son will be going to college (hopefully) - does my wife's plan also become available, even though she will only be in her late 40s?  We're willing to be flexible here in terms of who funds what in order to make the funds available for his education.

  One last note.   My health is such that I could probably not qualify for any sort of plan, such as a variable annuity, that requires a medical exam.

Answer:
My wife recently started a small - (2-person) business.

We need to know exactly how the business is structured to give too much help.  If you are a sole proprietor, a SEP is usually best.  If you are a corporation, a Simple plan may be better, but a SEP allows a higher income limit, but may force you to include all employees. Others argue that a Keogh plan is better.  How much do you expect in revenue, expenses, salary, etc.  Do you expect these numbers to change from year to year?

Any recommendations?  If I retire at 60  - about the time my son - will be going to college (hopefully) - does my wife's plan also become - available, even though she will only be in her late 40s?

Generally, you can withdraw from a SEP, IRA, or 401K at any time without penalty as long as you systematically withdraw over your expected life span. You do have to pay taxes on any money you withdraw. Any onetime withdrawals will involve a penalty (except in some cases where you put the money back in within 60 days).  At least that is how my financial planner explained it to me when I "borrowed" from my SEP to build a house.

Another alternative to consider would be to set up your business as a corporation.  Since you will not be showing that great of a profit, any money that is retained in the corporation will be taxed at a fairly low rate.  Have the corporation retain and invest the money for your son.  Set it up so that the owners are common stock holders, and your son is a preferred stock holder (non-voting, so no control).  Since the company will have little value at first, there will be no tax problems in giving him zillions of shares. When the time comes for you son to need the money, simply declare a dividend to the preferred stock holders (or put him on the payroll). Either way, since he will also be in a lower tax bracket, his tax portion will be comparatively low.  If your son is on the payroll, the money you pay him will essentially be tax-deductible to the corporation (since it is an expense, it is subtracted from revenue before figuring out profit, and it is profit that is taxable). If you set up the corporation as a Nevada corporation, you can also avoid state taxes on the investments.