Simply Junior

Self directed IRA accounts work great for those who want to make their own financial decisions, but what about individuals who are self employed or own small businesses? Where do they turn when it comes time to think about retirement plans?

Most of businesses aren’t big enough to qualify for a large retirement plan. So the IRS has constructed several small business retirement plans for these people to take advantage of. When it comes to retirement age, many self employed and small business owners could be left with a meager social security check that would not meet the needs of the lifestyle that they are accustomed to living.

Fortunately, most reputable self directed IRA custodians also offer plans such as SEP, SIMPLE, Solo 401(k), and Roth Solo 401(k).

Simplified Employee Plan (SEP)

The SEP is a retirement plan meant for self-employed individuals and small business owners. Typically, the small business has less than 25 employees. This plan offers the individual a retirement account that doesn’t require complicated qualified plans such as a conventional IRA or 401(k). Advantages include:

• All contributions are tax deductible and compound with tax-deferred savings until the time of withdrawal.
• The employer may contribute up to 25% of the employee’s wages with a maximum of $49,000 each year.

Savings Incentive Match Plan for Employees (SIMPLE)

If you own a business with less than 100 employees and do not have any other type of qualified plan available, the SIMPLE is something to look into. With this plan, you and your spouse can make contributions if you make $45,000 or less per year. Advantages include:

• Tax deductible investments compounded with tax-deferment until the time of withdrawal.
• Employee contributions up to $11,500 for those under the age of 50.
• Employee contributions up to $14,000 for those over the age of 50.
• Employers match dollar for dollar up to 3% of the employee’s compensation.

Solo 401(k)

Think of this plan as a combination of the SIMPLE and the SEP. Basically, a sole proprietorship is offered a qualified plan that allows larger contributions and larger deductions. Advantages include:

• You don’t have to be incorporated to qualify. This includes sole proprietors, partnerships and corporations, too.
• Contributions can reach $16,500 annually if you are under the age of 50.
• Contributions can reach $22,000 annually if you are over the age of 50.
• 0-25% of your profit sharing may be included, too.

Roth Solo 401(k)

The Roth works the same as the Solo 401(k), but you also have the added tax benefits of a Roth IRA. Contribution levels remain the same, but taxes are paid before they are put into the retirement. Additional advantages include:

• If your income limits exceed qualification levels for a Roth IRA, you may be able to consider the Roth Solo 401(k) as an option.

There is a Retirement Plan for Everyone

If you thought that you would never be able to participate in a qualified plan, and you were starting to look at other investment opportunities, you still have some other options. Generally, a retirement plan will offer compound interest through tax deductions and tax deferment that other types of investments aren’t able to offer.

If you are looking into the different types of self directed IRA accounts that you may qualify for, you may want to consider one of these four options.

It is important to make good choices when it comes to saving for your retirement. Having a Financial Planner or Accountant review your current portfolio and your goals for the future is the first thing you should do; as they can help you determine investment vehicles that align with your risk tolerance and savings objectives.

But where do you start? Which retirement plans should you focus on? What are the differences between the various retirement plans out there?

Many Advisors would agree; that if the company you work for offers a 401(k) plan, a pension plan or a 403(b), you should take advantage of the opportunity to enroll. Typically, employers make monetary contributions towards these plans and the internal fees associated with these types of accounts are usually lower than with individual retirement plans. Because of these features, over time, it benefits you two-fold to put your money into them.

Though investing in an employer-sponsored plan has its advantages, it has some disadvantages as well. The investment options you have are usually very limited. And more often than not, you are required to name a spouse or child as your beneficiary. This being said, it is still an excellent way to save and acquire for retirement, it just shouldn’t be your only investment vehicle.

With the current trends of changing careers every 5 to 10 years, many of us will need to roll our 401(k)’s long before we actually plan to retire. Transferring or “rolling” your employer-sponsored retirement plan to a self-managed IRA may be the best option for you. Keep in mind that some companies will automatically cash out your retirement plan if the balance is under a certain amount. If this happens, they will be required to hold back 20% for taxes, and you may get hit with a 10% penalty for withdrawing the cash before 59

After you leave a job, there is a big tax question you will have to deal with and that is what should you do with any money you have in a qualified retirement plan with that former employer. This included the 401(k), stock bonus, profit-sharing and any other qualifying plan. Generally you would be advised to roll it all into an IRA.

While this usually makes a lot of sense, it allows you to take management of your funds for retirement and continue deferring taxes on income the funds generate. Be aware though, if this process is not handled correctly the rollover can end up being very costly. Let us take a look at the property way your should arrange your rollover tax-free.

Roll over directly (trustee to trustee)

If the decision to rollover is what you made, make sure you plan for a trustee-to-trustee or direct rollover from your retirement account into a rollover IRA. Don’t have the check written to you personally, make the check you receive from your company’s plan out to the trustee or the custodian of your new rollover IRA. You can even have a wire transfer made into your new IRA rollover account.) Since the new IRA has to be set up before you receive the rollover, your IRA account can remain empty until the rollover transaction is made.

The direct rollover is essentially important because if you get the check made payable to yourself there is a 20% taxable amount withheld for the federal income tax. Leaving you with sixty days to get the “missing” 20 percent and put it in the rollover IRA. And you will end up owing taxes on that 20%. And you will end up paying the dreaded ten percent early withdrawal tax as well if you are under 55.

If you are Over 55 you Should not Rollover Any of the Money You Need

Generally rollovers are good because they defer the taxes, but think about it this way… you are over 55 and you get a payout from the former employer’s retirement plan, you will not have to pay the premature 10% withdrawal tax if you keep the money (but you will still owe the income taxes). But if you roll that money into the IRA and then you need to take some out later, before the age of 59.5, you will have to pay a ten percent penalty tax on it.

Obeying the 60-Day Rule

This is another pitfall in the rollover, failure to meet their 60-day ruling. You will have to deposit the distribution into the new rollover IRA within the 60 day period in order to get the tax-free rollover. This 60-days will start the day after the funds are received from the company’s retirement account. And if the 60-day period ends on a holiday or weekend, you will not get any slack.

The Bottom Line Is

It might seem like a simple task, however arranging your tax-free rollover of your retirement account is not so simple. I have seen failed rollover attempts from people many years now and there is no end in sight. Ask the advice of a tax pro to clarify anything you don’t understand that we went over in this article.