Pension Plan: How can self-employed save effectively for their retirement?

Pension Plan- Retirement plan sep ira

Pension Plan – Retirement plan sep ira

“The trouble with retirement is that you never get a day off.”

Abe Lemons

This quote by Abe Lemons says it all about retirement. Retirement is indeed a job that one can never quit, so it might make sense to live it off in the best way possible. For most of the corporate/government/private sector employees, their respective employer takes care of their retirement and they have multiple plans to choose from. But, how should self-employed individuals save considerably for their retirements? Being self-employed offers freedom and if you are planning to enjoy that freedom during retirement, it makes sense to choose a pension plan for your golden years of rest.

SEP IRA: Best Ways to Have a Sustainable Pension Plan

It is quite common among self-employed individuals to ignore their retirement savings until they reach 40 or even older. The key to a comfortable retirement is to consider your retirement investments as a business cost and carry them along with other retirement options.

SEP IRA for Self-Employed

SEP IRA (Simplified Employee Pension) IRA is one of the best retirement options available in the market. Self-employed individuals can create SEP IRA fund for themselves as well as their employees (if any) with easy maintenance steps.

  • SEP IRA is easy to implement. This is the primary benefit of SEP IRA and allows you to open and maintain an account without excessive paperwork. You don’t have to file tax annually for your savings and contributions.
  • SEP IRA has a maximum contribution of $260,000. SEP IRA allows you to put away up to 25% of your business income along with a retirement contribution of $52,000 making it $260,000 cumulatively.
  • SEP IRA offers easy tax savings. If you are planning to save more tax money, open a SEP IRA right before tax payments and contribute before April 15, 2015. If you need an extension, you can request the same and put in contribution up to October 15,2015. Which other tool would offer such freedom in your contributions?
  • SEP IRA has no minimum contribution limit. One of the best parts of SEP IRA is that you do not have a minimum contribution limit and if you had a tough financial year, you can plan not to invest anything. It means no compulsory contributions or financial pressure for the same.

In short, you get an incredibly huge contribution limit, tax savings, choice to back off yearly contribution, and maintain your pension plan with minimal paper work. What more could you expect? Start investing this year and build a golden egg for your retirement.

Rental Property and Individual 401k Rules: What You Need to Know

Individual 401k Rules

Individual 401k Rules

As we discussed investment options with Solo 401k, it seems that real estate grab the most attention. It is no surprise, real estate is among the non-traditional investments that were previously not available to qualified retirement plans. Individual 401k rules allow investment in real estate, with rental property included. With the demand for rental property on the rise, more and more investors are looking at this type of asset as a way to improve their portfolio.

However, is it really that simple to invest in rental property with an individual 401k plan? What about prohibited transactions and what do you need to know?

How does it work?

The most important rule when investing your individual 401k is that the property will be registered to your fund. You will act as the trustee of the fund and facilitate the transactions, but for your fund instead.

Think of your fund as a friend or client who asked you to help them buy a property and set up rental payments. You help to do the work, but every transaction will be in their name. Similarly, when investing with your Individual 401k, the property will be paid from your 401k, it will be registered to your 401k, and any income from rental payment or selling the property will have to go directly to your retirement account.

Avoid prohibited transactions

To avoid triggering a prohibited transaction, keep in mind that this investment should not benefit you or other disqualified person in anyway. Take your time and go through the list of disqualified person.

What does it mean when we say you cannot benefit from the investment? That means you cannot use the fund to purchase a property that you already own. The rental cannot come from you or any disqualified person, and all payments have to be paid back to your retirement fund.

According to individual 401k rules, your personal 401k account will also have to be able to finance the property entirely, or be able to qualify for a loan on its own. The account holder and other disqualified person cannot be a partner, creditor, or guarantor for the transaction. That is why only non recourse loans are permitted,so that the 401k fund can qualify for a loan without any credit history or guarantor.

Overall, investing in real estates and in particular, rental properties, can provide great return to grow your retirement fund. However, as with any other non-traditional assets, there are certain rules and guidelines you need to know. When in doubt, check with your 401k provider or financial advisor to avoid unnecessary fees and penalties.

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Which self-employed retirement plan should you choose: Solo 401(k) or SEP-IRA?

SEP IRAs to choose from

SEP IRAs to choose from

Are you a self employed individual? Every self-employed individual has to plan his retirement (well for all the freedom you get, there is apparently some cost to bear). However, with the availability of plenty of retirement options available in the market, all you need to do is to search on internet or get in touch with a financial planner. The market is full of private companies, financial institutions, and government schemes that allow you to safeguard your future.

Solo 401(k) and SEP-IRA are undoubtedly the best among the available retirement plans for self-employed individuals. It is a common question among investors that which one is better and individual contribution limits etc. Well, it depends upon your requirements and nature of work. Each of these plans has some advantages and some shortcomings. If you are looking for some answers, let us help you differentiate between these two.

What makes solo 401(k) and SEP-IRA different?

  • Contribution limit:  While both plans solo 401(k) and SEP-IRA have individual contributions limits of $51,000 (for 2013), the 401(k) allows you to contribute more of your salary below that cap. Both these plans allow one to contribute 25 percent of the earnings (for sole proprietors, the contribution is 20 percent). But the 401(k) allows an additional $17,500 in salary deferrals. So, depending on your salary and how much you want to contribute, the 401(k) might be a more attractive option, because you can save more money.
  • Maintenance requirement: There’s much less paperwork associated with the SEP than there is with 401(k). Of course, a little paperwork shouldn’t keep you from making the most out of your money, but it keeps you away from that baffling and crappy paper deal.
  • Extra fees: “Solo 401(k)’s do in some cases have more administration fees than SEP IRAs or other plans. Investors need to analyze whether they save aggressively enough to justify those fees.” Combine this with all of the recent attention on hidden 401(k) fees, and the SEP is an even more prioritized option.
  • Higher and recurring payments:With the SEP-IRA, it’s up to you when and how much you want to contribute. Another administrative responsibility of the Solo 401(k)? If your plan assets exceed $250,000, you’re required to file IRS Form 5500 yearly.

We pondered upon every single important aspect of both the plans. So keep all these points in to consideration. Choose better and convenient option for your retirement funds. Make sure you have enough funds ready for your retirement days!

Self-directed Solo 401 k Plans Put Account Holders In Driver Seats

Solo 401 k Plans

Solo 401 k Plans

After the financial crisis in 2007, it is clear that even the most reputable trust companies can still fail to deliver desired performance on the best 401 k plans. Retirement funds are meant to grow by itself, so that retirees can enjoy their life after work. So when these funds start to shrink instead of growing, a lot of account holders face the risk of prolonged work life with no secured retirement in sight.

With custodians and trusts underperforming, more and more account holders are asking to take charge of their qualified retirement plans themselves and ensure that it grows.

The answer to that is the increasing number of more flexible retirement plan options, where more investment choices are available and also more control is given to account holders. The surprising fact is that even when these flexible options are made available, not all investors are quick to take up the offer.

The reason is that, while some people keep track of the stock market daily, the rest of us are more invested in some other fields for a living. Giving a novice investor total control of his stock portfolio is no difference than letting a child drive a car without any instruction or training.

That is why self-directed option is proven most popular with account holders of Solo 401k plans. The flexible retirement plan is available to self-employed individuals with no other employee.

With this plan, account holders can choose from a wide range of investment options, including stocks, bonds, real estates, private businesses, and precious metals.

It’s like letting the man drive and also let him choose his favorite vehicle. The account holder can now decide on the assets he is most confident about, and make all the decisions concerning that investment.

Solo 401 k plans also come with a checkbook control option, which means the account holders can now make investments as easily as writing a check.

This, in our opinion, is a great breakthrough when it comes to retirement plan. Of course, some people are happy with having their fund set up and invested for them without much work on their parts. However, for the young generation of self-employed, innovative entrepreneurs, the option to take charge of their future is certainly welcomed.

 

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Which Self Employed Retirement Option is Right for You?

Self Employed Retirement Option

Self Employed Retirement Option

Once you decided that a Solo 401k is what you want, it is time to take a look at the options available to you. As a self-employed individual, you are qualified to set up a Solo 401k with a custodian or trust company, a bank or brokerage firm, or set up your fund as self-directed. Each of these self employed retirement options has its own guidelines and it’s important to find out which of these are the best fit for your situation.

Custodians or Trust companies

This is probably the easiest option that most people elect to go with. Think of it like a whole service package: your savings will be put toward a particular investment portfolio. These portfolios typically consist of non-traditional assets, such as real estate, private business, or tax liens.

The drawback is that you will not be able to decide on your investments without getting approved by the custodians or trust companies. It is also more expensive, as account holders will have to pay a variety of fees to set up account, maintain it and so on.

Banks and Brokerage firms

This option is a fit for conventional investors, who often find themselves leaning toward investments in stock or mutual funds.

Banks and brokerage firms often allow account holders to invest only in the products they offers. Therefore, if you are looking at non-traditional investments, this is not the best choice. Also, keep in mind that most banks will not provide loan options to self employed retirement plans (which compete directly with their loan service with lower interest rate).

Self directed Solo 401k 

This is the most flexible option out of all three, as it allows you to be the trustee for your fund. The investment choice is also the most flexible: you can choose to invest in both traditional and non-traditional assets, or any combination of those.

Since you are making all the investment decision, there will also be less fees and no approval process needed.

Self directed retirement plan is the best fit for experienced investors, who want to take charge of their portfolios. Keep in mind that the fund can only perform if they are invested wisely, so account holders are encouraged to study their investment options before making the switch to self-directed plans.

 

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Checkbook IRA: How It Benefits Self Employed Individuals

Checkbook ira benefits

Checkbook ira benefits

 

Are you seeking a self-directed IRA with “checkbook” control? Most of the self-employed professionals are baffled with the large number of retirement options available in the market and often find it difficult to choose one. Checkbook control gives an investor complete control over his/her investments and it is possible to direct it in the desired direction. Because of the control it offers, it stands out to be the best retirement plan in the market.

What is Checkbook IRA?

It’s simply an IRA that comprises of an LLC of which you are the owner and have control through a checkbook account. While it is quite simple in principal, the steps to set up and run it properly within the rules can be a little complicated.

IRAs are a big source of capital investment. Every concerned financial planner is drooling over your money of IRA, and his or her goal is to get as much IRA money under management as feasible. In order to attract more number of people into investing IRA money, self-directed trustees of IRA have become very vibrant at making promises to potential clients.

Why checkbook IRA is a better option for self employed individual?

  • Complete Control over Transitions: This is the basic thing that makes Checkbook IRA so powerful. First, ability of transitions from your IRA to a Self-Directed Custodian, one without any investments to sell you. It is easy to use the IRA form and own a customized LLC (limited liability Company). Applicants are named as the manager and have the sole signature authority. LLC is a legitimate entity, which has powers and protections that are not possessed by any other individual or by any regular IRA.
  •  Protection against lawsuits: Another reason why Checkbook IRA is considered as the best retirement plan is that it helps to protect the IRA account from lawsuits. While an IRA account is completely protected from creditors of the account holder, the account itself can be projected to liability by owning risky assets like real estate. LLC will enable you protect the account from any such liability.
  • Opportunity to invest: Checkbook IRA could be used in any sort of ventures. It can be profitable to do a joint venture with a non-disqualified person or in a partnership. It is helpful in the regard that it gives you privilege to avail the investment opportunity by using checkbook IRA.
  • Invest on your own terms: With checkbook control, the IRA owner can use the money any way he or she wants. Usually, one would be able to make good investments in real estate or any other asset that will yield a good return, because any return on investment goes directly back into the IRA.
  • Minimum tax liabilities: Stocks in the corporation or membership interests in the LLC are sold to the IRA. The IRA pays fixed amount of money for the stock or membership interests, and in return the IRA gets a stock certificate or a certificate of membership. There is no tax consequence to the checkbook IRA.

 

So You Have a Self Employed 401k Plan, Now What?

Self Employed 401k Plan

Self Employed 401k Plan

Every year after tax season, we take a good look at our financial situation, including retirement savings and tax-deferred benefits. For self-employed entrepreneurs, it is even more important to think ahead about your retirement future, as you are on your own. No one can act on your benefit, so it’s time to take charge and ensure a better future for you and your family.

Are you having the right retirement plan?

For self-employed business owners, there are options of SEP IRA, simple IRA and Solo 401k. Each comes with its own benefits and drawbacks. For example, Solo 401k is often considered the best retirement plan for self employed entrepreneurs who want maximum contributions or flexible choices of investments. However to qualify for a Solo 401k, you cannot have any other full time employee, and therefore, the plan is designed for freelance consultants and owners of very small businesses. SEP IRA and Simple IRA is more flexible in term of numbers of employees, but the contribution limit and investment choices will not be as flexible as a self employed 401k plan. It’s best to consider your business and personal needs in order to choose the right plan.

Are you saving enough?

It’s time to think about your future plan. For example, are you planning to retire at 60 or earlier? How much would you like to have in your retirement fund by then? And will you be able to make it in time with your current level of contribution? Remember the money will only grow when you put it into the fund and invest it wisely. So start putting more into your retirement plan now.

To find out if you are reaching the maximum contribution limit, use our contribution calculator. With a Solo 401k, you can contribute as much as $56,500 a year as a combination of salary deferral and profit sharing contributions.

 Are your investments the best for you?

Often if you don’t make an investment election, your 401k plan will just go with default options, which are considered more stable but with low returns. This might work if you are young and have many years to save up toward your retirement. However, if you want to retire soon, you might be better off with a different allocation of assets. This is why we encourage account holders to talk to their plan providers about their needs to decide the right portfolio for them.

Account holders of self employed 401k plan can also elect to be a trustee of the plan and select investment options on their own. This way, they will be able to create an optimized portfolio that is tailored to their needs.

 

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