Top Five Questions about Participant Loans for Self Employed 401 k Plans

Self employed 401 k plans

Self employed 401 k plans

A big advantage of having a Solo 401k account is that account holders have the option to borrow money from the plan. This option sounds good in theory, as it provides a resource for emergency needs. However, in reality, many account holders shy away from this option because they don’t understand the loan regulations and requirements. Borrowing from a self employed retirement accounts can be more simple than you expected. Let’s take a look at the most commonly asked questions about Solo 401k participant loan.

Question #1: I heard that all self employed 401 k plans allow borrowing from the plan, is it true?

Answer: Although it is true that IRS allow account holders to borrow from their Solo 401k, not all providers offer loan option. Some providers allow loan options, but will not prepare the necessary paperwork required. So make sure to find a good plan provider who can help you facilitate the loan application when needed at no extra charge.

Question #2: What can I use the borrowed amount for?

Answer: The unique thing about borrowing money from self employed 401 k plans is that you can use the borrowed money for any purpose at your discretion. As long as the loan and interest are paid back, you are free to borrow money for any personal needs, even to pay off credit card debts.

Question #3: How much can I borrow from the plan?

Answer: A Solo 401k plan allows its account holder to borrow up to $50,000 or 50% of the account balance, whichever is lower.

Question #4: What are the costs of borrowing from self employed 401 k plans?

Answer: Account holders are responsible for paying back the loan amount plus interest rate, which is prime rate plus 1%. Keep in mind that this interest rate will also be paid back into your retirement account.

Also, some plan providers will charge a fee to set up the loan application, so check with your plan provider first.

Question #5: What are the requirements for repayments?

Account holders are required to pay back both the principal and interest amounts within 5 years. Also, payments should be made at least quarterly in roughly equal amounts.

To determine your payment schedule, try using our Solo 401k loan calculator.

In general, it is advisable to keep your money invested on a tax-deferred basis with a Solo 401k. However, when in needs, having a loan option can be a great financial help. For example, if the account holders have credit card debts that come with hefty interest charges, it will make sense to borrow money from their Solo 401k to pay off the debt, and then pay back the loan with a much lower interest rate.

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Self Employed Retirement: Building Efficient Retirement Plans for Individuals

Retirement plans for individuals

Retirement plans for individuals

The United State of America has become a country with an increasing number of freelancers, consultants, and independent contractors. Flexible work routine, control over work hours, and ownership of the profit are some of the benefits of self-employment. However, self-employed individuals do not enjoy the retirement benefits of a job and they have to take care of all the financial necessities that come along with retirement. If you are self employed and looking for retirement plans for individuals, here are some tips to get started.

Invest in Retirement Plans for Individuals

Have you invested in solo 401 k or SEP IRA plans? Being self-employed comes with financial responsibilities and it is important to choose a retirement plan as soon as possible. For individuals looking to boost their retirement savings, Roth IRA is another excellent option and it offers tax-free retirement money.

Under Roth plans, your investments are not exempted from tax; however, you will be able to enjoy tax-free savings at the time of withdrawal. It is possible to borrow money from Roth plans for emergencies and after 59 ½ years of age; you can withdraw funds without any financial penalty. You can invest up to $5,500 against your Roth plan and the investment limit goes up to $6,500 for individuals above 50 years of age. It is best to consult a retirement expert and ensure financial security for your retirement.

Emergency Fund for Healthcare

Everyone needs healthcare and many people required additional care during retirement. It is extremely important to maintain good health and one should try to stay fit as much as possible; however, one should not ignore the need of medical care during retirement years. If you are planning to retire in the next few years, it might help to get an estimate of your healthcare requirements and evaluate your income streams accordingly.

One of the most important things to do is to sign up for Medicare as early as possible. Timely participation into Medicare would help you reduce your premiums and extend coverage limit. You should visit government hospitals and find out the cost of medical support and deductible costs during hospitalization. Having an idea of these expenses will help you choose retirement plans for individuals accordingly and arrange additional funds for these deductibles. In the end, make sure to work as long as possible because your working period and total income earned will decide the amount of your social security check.

Four Principles of Successful Investing with Self Employed Retirement Plans

Self Employed Retirement Plans

Self Employed Retirement Plans

Most people think of retirement plans as saving funds with tax benefits, and ignore the fact that they are investment funds. With self employed retirement plans, account holders should look beyond maintaining the account and instead look to grow and maximize the fund. These are four principles that will help you make better investment decisions:

1. Start saving and investing immediately

Obviously, before you can invest with your retirement plan, you have to put money in it first. With self employed retirement plans, the contribution limit is quite high at around $51,000 per year for an Individual 401k or an SEP IRA. So make sure you know the maximum contributions available and start saving immediately. The earlier you start saving and investing, the more you will benefit from compounding returns on your investments.

2. Take long term investments over short term ones

As it is your retirement at stake, so look forlong term investments that are less likely influenced by volatile market trends. Keep in mind that some self employed retirement plans have more flexible investment choices than other. For example, with a self-directed individual 401k, account holders are allowed to invest in real estate, which is often seen as a long-term investment that requires little trading over the years.

Long term investments with less trading will also save you on transaction fees on self directed accounts, or custodian fees on brokerage based accounts.

3. Decide on your investment portfolio

A lot of retirement plans are built upon target date funds, which offers high security but very low return. This may work for older account holders, who are looking to keep the fund safe closer to their retirement date. However, younger account holders may want to look at other options with much higher return. Because of the compounding rate, a small increase in return now can add up to a big amount when you start receiving distribution from the plan years later.

4. Become an educated investor

For self-directed 401k accounts, account holders are able to choose between many different assets, ranging from traditional stocks and bonds to real estate and precious metals. In these cases, it is best for account holders to consider the types of assets they know best.

For other type of self employed retirement plans, although the choices of investments are limited, account holders can still learn more about options available to them and decide if their portfolio is the best available.

 

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Qualified Pension Plan: Why self-employed women need to start saving early?

Qualified pension plan

Qualified pension plan

Self-employment offers the freedom to work for yourself and develop potential career prospects. Are you an independent working women? Saving for retirement is equally important for both men and women. If you have not been saving well for your retirement, here are some important things that you need to consider while choosing a qualified pension plan.

Important retirement facts concerning self-employed women

Some important facts came up in the 11th Annual Transamerica Retirement 2010 Survey conducted by the Transamerica Center for Retirement Studies. The survey highlighted that a majority of women lost their confidence in retirement savings and they were comparatively less optimistic towards their financial improvement during retirement. Some key findings of this survey are:

  • 29% of the employed women plan to work longer than male counterparts
  • 61% women dropped their rate of spending since the recession
  • 45% women are saving less after recession
  • Only 6% women are confident about a comfortable retirement

In addition to these factors, women spend nearly 11.5 years out of workforce and they outlive men by at least 5 years. All of these factors together highlight the need of a well-thought retirement plan.

Choose the Best Qualified Pension Plan for Self Employed

There are several retirement plans available for the self-employed and you can choose one according to your financial requirements.

Solo 401 K Plan

When it comes to the best qualified pension plan, solo 401 k is among the best because of the dual contribution feature. One can contribute up to $17,500 as part of salary deferral contribution, plus they can also make profit sharing contribution with the maximum combined contribution of up to $52,000 under employer income percentage. In addition to the higher contribution limits, solo 401 k allows multiple investment options including real estate, bonds, bank CDs, foreign currency, precious metal, tax lien, and similar options. Solo 401 k allows you to borrow money from the plan and it can be crucial during financial crunches.

SEP-IRA

Simplified Employee Pension is an exciting retirement plan for self-employed individuals and you can keep putting in up to 25% of your total business income (maximum $52,000). Contributions to SEP-IRA are tax deductible; however, it can be costly if you have employees because you need to make equal contribution to their retirement funds as well.

In addition to these plans, you can choose among defined benefit plans, SIMPLE IRA and Keogh Plans. It is important to evaluate these retirement options and choose one accordingly.

The Best Day to Set Up a Sole Proprietor 401k is Today

Sole Proprietor 401k

Sole Proprietor 401k

Often, a large corporation uses 401k benefits as an incentive to recruit and retain the best staff. Small businesses, especially the ones without any other employee besides the owner, often delay setting up a retirement plan because there are always urgent and pressing needs associated with a new business.

While the delay may buy some time for the business to grow, it could be one of the biggest financial mistakes. As often, self-employed business owners forget that it’s their benefits at stake, and that a proper retirement plan is what ensures a better future for themselves.

As an incentive for small business owners to save up for their future, the sole proprietor 401k, or Solo 401k, is introduced with a lot of unique advantages over other qualified retirement plans. One of the most obvious benefits is the high contribution limit, which allows account holders to save up to $56,500 annually. For every year the owners delay having a retirement account, he or she is missing out on tax-deferral benefits on up to $56,500 in income.

Setting up a solo 401k doesn’t have to be a strenuous task either. The eligibility is quite straightforward, as long as a person can prove his or her self-employed income and without any full time employee, he or she will be able to qualify for the plan. Also, as we all know growing a business might require some urgent cash at times, a Solo 401k loan option is also available. With this, account holders can borrow money from their own fund without any tax or penalty charges as long as they pay it back within 5 years.

The plan’s benefits are quite obvious, but the longer you delay it, the less benefit you can enjoy. According to a Time magazine article, the average age of successful startup founders is 40. If we consider 60 is the average age for retirement, these entrepreneurs have only 20 years left to set up for their retirement.

Assuming they max out the contribution limit of $51,000 a year, that will give them just about a million in their fund, before any return from investing that amount.

For a middle class American, a million is the benchmark to maintain their living standard after retiring. That means a person has to get started on his or her savings right away in order to reach that level.

 

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Five Things to Do Before Applying for Individual 401k Plans

Individual 401k Plans

Individual 401k Plans

Solo 401k plans are generally considered the best 401k plans for individuals in most cases. However, once you decide to open an individual 401k plans, there are still a few more steps to take to secure the best retirement option available and to avoid costly fees or penalties in the future.

1. Know the contribution deadline

In order to make contribution next year, an individual has to have his or her Solo 401k plan set up before December 31 of this year. Contributions can be made until the tax-filing deadline. In order to take advantage of the high contribution limit, make sure you know and follow the contribution deadline.

2. Consider Self-directed option

Many benefits and unique features of individual 401k plans are only available to self-directed accounts, including the flexible choice of investments and the option to become the trustee of your account. Since not all providers offer this option, deciding on a Self-directed account can also help you shorten the list of providers to choose from.

3. Choose the right plan provider

A good plan provider offers all the services you need in order to maintain your retirement account in compliance with IRS rules and regulations. Some services you should look for include assistance with tax filing, loan documentation, roll over or transfer of funds, and so on. Deciding on the right plan provider can save you a headache later on.

4. Know your investment options

With a self-directed individual 401k plans , plan participants can choose from the widest range of investment options, from traditional stocks and mutual funds to real estate and precious metals. With brokerage-based accounts, unfortunately the account holders will be limited to certain investment products. Knowing what is available to your retirement plan will help you elect the best options for your portfolio.

5. Decide if you want a Roth account

A Roth account will let you make after-tax contributions and make tax-free withdrawals in the future. Depending on your financial situations, this may save you a lot of money in taxes. We recommend our account holders to consider their tax situation to determine if a Roth account or sub-account is a better choice for them.

Having an individual k or Solo 401k can help small business owners and independent contractors build a solid foundation for their retirement, but only if they make the right choices. These 5 steps will help you decide on the best options to set up and grow your fund.

 

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Solo 401 k Plan: How Can You Flip Houses Tax Free?

Solo 401 k plan

Solo 401 k plan

Real estate has always been a lucrative investment and it is considered as one of the most secured choices with higher returns. Entrepreneurs and small business owners often invest in real estate. Are you interested in real estate investments? The good news is that solo 401 k plan allows you to invest in real estate and you can even enjoy tax-deferred gains. Solo 401 k investors can use their plan for investing in commercial, residential, domestic, and foreign real estate. You don’t even need custodian consent for investing in real estate.

Tax-Deferred Gains: Flip Houses with Solo 401 K Plan

If you have never made a real estate investment with solo 401 k, don’t be afraid of the legalities because it’s as simple as writing a check for the property. IRS allows the trustees of solo 401 k plan to make a real estate investment and the property will belong to your plan only. All you need to do is to write a check and purchase the property of your choice.

The best part of flipping houses with solo 401 k is that you can use this money for purchasing the property, repairing it, and even flipping it for property without requiring any third-party consent. Any profit that you make in the deal is tax-deferred and you would be required to pay taxes only at the time of distribution.

How Solo 401 k Plan is different from traditional 401 k plan.

In case of traditional 401 k retirement plans, you need permission from the custodian. Nearly 95% of the custodian won’t allow real estate investments. On the contrary, you have complete control over solo 401 k plan and you don’t need third-party consent for making a real estate investment. The best way to use your retirement funds for real estate investment is to start a solo 401 k and and enjoy solo 401 k plan benefits.

If we average real estate investments with stock market, properties have always performed better and investing in it will ensure best returns for your investments. You can even use the property for rental and then sell the house after a few years. However, make sure to consult a retirement expert or agency to understand different aspect of the process and the best tips for saving maximum tax money. It is time to have complete control over your retirement funds and live a prosperous life even after retirement.