Retirement Savings Plans for Entrepreneurs

Retirement Savings for Entrepreneurs

Running your own business as an entrepreneur provides you with worlds of opportunity to create a meaningful life and grow real wealth.

But self-employment comes with a lot of responsibility, too. You’re the boss, you have to keep track of your expenses and income, you have a greater tax burden, and you have to figure out how to fund your retirement.

According to a survey from TD Ameritrade, 70% of entrepreneurs aren’t contributing to a retirement plan. 40% of self-employed individuals aren’t saving regularly, and 28% aren’t saving at all.

Those are some frightening statistics, but you don’t have to be a part of them.

If you’re behind on saving for retirement, consider these 5 different retirement account options for the self-employed, so you can start saving as soon as possible.

Traditional and Roth IRAs

We’ll start off with Traditional and Roth IRAs. Anyone can open one of these accounts — self-employed or otherwise — and they’re a great starting point when looking to fund your retirement.

The contribution limit for each of these accounts as of the 2015 tax year is $5,500 for those under 50 and $6,500 for those over 50.

What’s the difference between the Traditional and Roth IRA? With a Traditional IRA, your taxes are deferred so you’ll get a tax break while you’re contributing. Your withdrawals will be taxed later on.

With a Roth IRA, the opposite happens. You pay taxes on your contributions on an ongoing basis, but you can withdraw your money tax-free in retirement.

Which should you choose? It depends on your personal situation. The general rule of thumb tends to recommend Roth IRAs for younger individuals who think they’ll be in a higher tax bracket when retiring.

Solo 401(k)

A Solo 401(k) is simply a traditional 401(k) for business owners with no employees (but your spouse can contribute if they earn an income from your business). It follows the same requirements as a traditional 401(k) as well.

As a result, you can contribute as both an employer and employee. As an employee, your annual contribution limit is $18,000 in 2015 ($24,000 if you’re over 50), and as an employer, you can also contribute up to 25% of your compensation.

The maximum total contribution limit (excluding catch-up contributions) for 2015 is $53,000.

Depending on your plan, the Solo 401(k) can be offered as a traditional or Roth, and it functions the same as the IRAs (with traditional growing tax-deferred and Roth growing tax-free).

SEP IRAs

The Simplified Employee Pension Plan (SEP) is similar to a Traditional IRA . You can claim a tax break in the year you make contributions, which means you can potentially save more as self-employed individuals tend to pay taxes at a higher rate than regular employees.

The SEP IRA also offers a sizeable contribution limit: you can contribute the lesser of 25% of your earnings, or up to $53,000 for the 2015 tax year.

Another bonus is you can contribute to a SEP IRA even if you’re self employed only part time, and you can still contribute to a 401(k) offered by your employer.

However, there isn’t a “catch-up” contribution policy in place for those over 50.

Simple IRA

You can take two routes with a SIMPLE (Savings Incentive Match Plan for Employees) IRA: you can open one if you’re the only employee of your business, or you can open one if you have fewer than 100 employees.

If you choose the latter, you either have to make a mandatory 2% retirement account contribution for every employee, or you can make an optional matching contribution of 3%.

Annual contributions are limited to $12,500 for the 2015 tax year, with catch-up contributions of $3,000 available to those over 50.

If you’re the only employee, a Simple IRA is a good choice if your income isn’t substantial – otherwise, a SEP IRA is the better option.

Other Plans

There are two other defined contribution plans available to self-employed individuals, and you can also contribute to a defined benefit plan:

  • Profit-Sharing Plan: This plan lets you decide how much you want to contribute on an annual basis. The limit is up to 25% of compensation (not including contributions for yourself), or $53,000 in 2015.
  • Money Purchase Plan: This plan requires a fixed percentage of your income to be contributed every year, also with a limit of up to 25% of compensation (not including contributions for yourself). The fixed percentage is determined by a formula stated in the plan.
  • Defined Benefit Plans: This is a traditional pension plan, which means the focus is on the payout you’ll get come retirement, not on annual contributions. You decide how much you want to be paid (the maximum annual benefit you can receive in retirement is up to $215,000 as of 2015), and an actuary must calculate the minimum funding levels you’ll need to reach each year to make that possible.

Start Focusing on Retirement

Self-employed individuals have it harder when it comes to money management, but that shouldn’t be an excuse to get behind with saving. Your future is important, and if you can’t save for something like an emergency fund, what do you expect to live off of in retirement? Prioritize saving in your budget and make retirement a possibility.

The amount of options can get overwhelming for entrepreneurs, so don’t be afraid to reach out to a professional to help you. You let a CPA handle your business taxes because they’re the experts and taxes are complicated. In the same way, a financial advisor can handle the planning side of the equation to ensure you’re creating a strong financial future for yourself.

Lump Sum or Payout: How to Withdraw When You Retire

Lump Sum vs. Monthly Payments

This week, your Money Guys tackle a question often asked by their clients in regards to retirement planning: “Should I take a lump sum payment, or a monthly pension payment?”

While the question seems simple on the surface, the decision involves more factors than you might think.

Brian and Bo walk listeners through the same decision-making process they offer their clients. They cover the pros and cons of each option, as well as the factors (and math) you need to take into consideration when making the decision.

This discussion was inspired by a Fidelity article on the lump sum vs monthly payment debate. The Money Guys are adding their own valuable thoughts and experiences on the subject today.

The Monthly Payment Option

The clear benefit of this option is that you’ll be guaranteed a stable source of monthly income from your date of retirement until you pass away. You also have the option to include your spouse in the deal so that they continue to receive payments after you pass away.

There are a few downsides, though:

  • You need to be able to count on the company continuing to exist, and we’ve already seen many companies struggle to continue paying pensions for their employees.
  • You need to take inflation into account!
  • Receiving a monthly payment limits your ability to afford an unexpected, large expense.

The Lump Sum Payment Option

The clear benefit here: flexibility. You receive a large sum of money and are free to invest some of it, take some of it to fund your monthly retirement expenses, or assign the money to be left to your heirs.

But there are downsides here, too:

  • You’re responsible for making this money last throughout your retirement.
  • Your money is then subject to market fluctuations (if you invest it), so therefore not as stable as monthly payments.
  • You’ll need to roll your payment into an IRA or employer qualified plan to avoid the distribution being taxed as ordinary income.

How to Decide? Do the Math

This is an extremely individualized decision, but Brian and Bo do their best to generalize the factors you need to take into account. You have to ask yourself if you have enough guaranteed monthly income for retirement, what your life expectancy is, and whether or not you want to leave an inheritance behind.

You can also use the formula Brian and Bo use for clients to help you decide — they share it within the episode.

Again, there are many factors to consider but by staying informed, you’re better equipped to make this decision. It’s one many people face, and this episode is a must-listen if you’re close to retirement and figuring out how to fund it.

5 Investment Mistakes Couples Make

Investment Mistakes Couples Make

Have you talked with your spouse about your investment strategy, or what the purpose is for your investments? Investing can be tricky enough alone, but it’s extremely important to include your other half in investment decisions so that you’re on the same page about how your money is being put to work.

If you haven’t yet discussed investing with your partner, you should read on to be aware of the common investment mistakes couples make so that you can avoid them.

Mistake #1: Only One Spouse Has Contact with a Financial Advisor

It doesn’t matter if one of you is more comfortable with the idea of investing. Both of you should be attending meetings and calls with your financial advisor because you’re in this together. You both have an equal stake in how your portfolio performs.

In the event that something happens to the spouse handling investments, the other will be lost when it comes to picking things back up. Avoid this burden by working as a team.

Mistake #2: Not Being Clear on Common Goals

You should be investing with a goal in mind — whether you’re aiming for early retirement, funding your children’s college expenses, or saving up for a down payment on a house in five years.

Are you and your spouse in agreement on your investment goals? If you haven’t talked about investing beyond “it’s the right thing to do”, then you should. Otherwise, you might face an issue down the road where one spouse wants to withdraw money early from a retirement account for an expense that was never discussed.

Mistake #3: Investing Without Being Informed

Just because your investments might be managed by someone else doesn’t mean you should blindly follow their advice. You should absolutely know what you’re investing in and be a part of the decision process.

Never be afraid to ask your advisor questions. They should be able to answer them honestly, and they should want you to understand the reasons behind their investment decisions.

Mistake #4: Not Taking Advantage of Employer Matching Contributions

Do you and your spouse have a 401(k) retirement plan offered through your employer? Are you contributing enough to receive the amount your employer will match?

If you don’t know the answers or aren’t sure, you need to look into this. You could be leaving free money on the table. You should be able to ask your HR department about the details of your retirement plan.

If you’re not sure what matching contributions are, here’s an example of how they work: If your gross annual salary is $75,000 and your employer matches contributions up to 6%, then that means you have to contribute 6% ($4,500) of your salary for them to match that contribution.

If you only contribute $3,000, then you’re missing out on $1,500 from your employer. Likewise, anything above $4,500 won’t be matched, but you’ll still be funding your retirement.

Mistake #5: Being Unaware of How Your Advisor is Paid

One of the biggest mistakes you can make is hiring an advisor without knowing how they get paid. Are they fee only, do they get paid a commission, or a hybrid of both?

This is important because you want to ensure there’s no conflict of interest when your advisor recommends certain products to you. If they make a commission off of sales, then they might not be looking out for your best interests.

You should also check to see if your advisor is a fiduciary. If they are, then there’s no doubt they’ll be acting in your best interests, as financial fiduciaries are required to do so upon taking an oath.

To avoid these common investment mistakes couples make, remember that investing requires teamwork. Neither of you should be working alone when it comes to financial matters.

If you don’t have confidence in your knowledge of investing, you can always learn from the many resources available to you online. Building wealth through investing will ensure a successful financial future, and it’s not a matter to take a backseat on.

Knowing When to Go Pro

Hiring a professional financial planner could possibly be the key that unlocks the door to your financial success.  At the same time, choosing the right advisor to work with is an important decision that can often seem overwhelming.  In today’s show, we discuss the services that planners will and will not provide as well as key things to look for when hiring a pro.

In the March edition of MoneyAdviser, Consumer Reports outlined what typical fee-only planners will and won’t do for their clients:

What they will do:

  • Help you figure your net worth:  Typically, a planner will have the client gather the necessary data and then create a statement to uncover other planning opportunities, such as insurance analysis or estate planning.  (Do-it-yourself tip:  Collect current statements for all assets and liabilities and use an online net worth calculator, such as Mint or Yodlee, to determine your net worth each year.)
  • Advise you on 401(k) investments:  Your planner should be looking at all the pieces of your financial puzzle, including your 401(k) to ensure that your saving and investing goals line up across the board.  (Do-it-yourself tip:  See if your 401(k) plan sponsor offers access to investment guidance or check out the online retirement-planning program, Financial Engines, for additional support.)
  • Help you invest a lump sum:  A planner should be able to offer tax-efficient investment advice to their clients, as this is a core activity of financial planning.  (Do-it-yourself tip:  Use Morningstar software to research mutual funds and stocks for your portfolio.  Also, check out Bo’s Money-Minute about investing in a lump sum vs. dollar cost averaging.)
  • Determine if you’re properly insured:  Your planner should be able to evaluate your insurance needs, as well as refer you to an agent that can provide the coverage.  (Do-it-yourself tip:  Do as much research as possible and shop around for the best rates.)
  • Assess if you’ve got enough to retire:  A planner can determine whether you are on track for retirement or if you need to explore other options, such as working longer or changing your lifestyle.  (Do-it-yourself tip:  Assess your potential income sources, including Social Security, and use an online tool to calculate where you stand.  Consumer Reports recommends T. Rowe Price’s Retirement Income Calculator and Analyze Now’s Free Retirement Planner.)
  • Coordinate your retirement income:  Planners can determine the best method for drawing funds from your various retirement accounts, while considering tax consequences.  (Do-it-yourself tip:  Consumer Reports advises that unless your retirements consists entirely of Social Security and a pension, you might want to consult a professional on this one.)
  • Help you plan for college funding:  A planner can guide you on the best ways to finance your child’s education.  (Do-it-yourself tip:  Visit www.collegeboard.com, www.savingforcollege.com, and www.finaid.com for additional resources.)

What they won’t do:

  • Help you pay down debt:  As a general rule, fee-only financial planners refer such clients to a debt counselor or a bankruptcy attorney.  (Do-it-yourself tip:  Contact the National Foundation for Credit Counseling if you need help with debt.)

The gray area:

  • Help you control your spending:  While many planners recommend following a budget, it’s not cost effective for you or the planner to spend hours together developing a detailed budget.  Most planners are interested in overall cash flow and will recommend cutting back if needed.  (Do-it-yourself tip:  Create a spreadsheet or utilize budgeting software like Quicken, Yodlee, or Mint.)
  • Create an estate plan for you:  Planners can help you decide the structure and tax efficiency of your estate, but an estate-planning attorney will be needed to draw up wills, trusts, and end-of-life documents.  (Do-it-yourself tip:  Contact an attorney to prepare or review your documents.)

If you decide that hiring a financial planning professional would be beneficial for you, the following credentials should stand out to you:

  • Certified Financial Planner (CFP):  holder has passed a 10-hour exam, has at least three years’ financial planning experience, and has completed an approved course of study.
  • Chartered Financial Consultant (ChFC):  requires eight college-level courses in financial planning and 30 hours of continuing education every two years.
  • Certified Public Accountant/Personal Financial Specialist (CPA/PFS):  CPA with specialized training in personal finance.
  • NAPFA – Registered Advisors:  holder meets strict education and professional requirements for membership in the National Association of Personal Financial Advisors, for fee-only planners.
  • Chartered Financial Analyst (CFA):  holder completes a series of three six hour exams and has four years of qualified work experience.

Hopefully this information will be helpful if you are considering hiring a professional to guide your finances.  Check us out on Facebook, YouTube, and please leave any questions or comments below!

 

Links to other things mentioned in today’s show:

Is This the End of Popping Vitamins?
On the Job, Beauty Is More Than Skin-Deep