Retirement Plans For the Self-Employed

November 28, 2009 by  
Filed under Retirement-Planning


With a SEP IRA in 2009 there is a $49,000 maximum contribution. This IRA is easy to set up and requires minimal administrative responsibilities. Disadvantages of this option begin with the fact that contribution limits are smaller than the limits of an Individual 401k at the same income level. This IRA does not have a catch-up plan provision like the Individual 401k, and loans are not permitted.

Main advantages of SEP IRA are that annual contribution is based on a percentage of W-2 wages if your business is incorporated and a percentage of personal income if your business is a sole proprietorship. If your business is an S or C corporation, or a LLC taxed as a corporation, up to 25% of W-2 wages can be contributed into a SEP IRA.

If your business is a Sole proprietorship, partnership or a LLC taxed as a sole proprietorship you are allowed annual contributions up to 20% of your net adjusted self employment income (or net adjusted business profits) which can be contributed into a SEP IRA.

The SEP IRA is a great choice for self employed business owners who would like to contribute up to 25% of their W-2 wages or 20% of net self employment income. A SEP IRA has broad appeal due to its high maximum contribution limits and its ease to set up and maintain.


Main features of an individual IRA is that in 2009 there is a $49,000 maximum contribution ($54,500 if age 50+ due to a “catch-up” provision), tax free loans are permitted, and loans are permitted up to 1/2 of the total value of the Individual 401k up to a maximum of $50,000. Another feature of an individual IRA is that there is an option to make Roth 401k contributions with the salary deferral portion of the Individual 401k. Contributions into an Individual Roth 401k are not tax deductible, but withdrawals are tax free after age 59 ½.

One disadvantage of an individual IRA is potentially greater administrative responsibilities and administrative fees compared to other self employed retirement plans.

Advantages of this option are high contribution limits and completely discretionary annual funding requirements. An Individual 401k may allow a greater contribution at the same income level due to the way the contribution is calculated. Another important distinction between this self employed retirement plan and others is a loan provision.


Features of this plan are that, depending on the age and income of the business owner, annual contributions can exceed $100,000 or more. Also, loans may be permitted, however this may increase annual funding requirements.

Main disadvantages of defined benefits plans are that they can be more expensive to set up and to maintain, along with having rigid annual funding requirements.

Main advantages of this plan option are that you can contribute more than the contribution limits allowed by the SEP IRA or Individual 401k. Defined Benefit Plans also offer substantial tax deductible retirement contributions and significant future retirement income. Depending on your age and income the annual contribution to a Defined Benefit Plan can exceed $100,000. Lastly, defined benefits plan may be ideal for business owners who wish to shelter the largest percentage of their income and/or who want to make the largest retirement plan contribution permitted by IRS rules.


A Simple IRA is easy to set up and has low administrative responsibilities. With a simple IRA self employed individuals can elect to defer up to 100% of their income up to a maximum of $11,500 for the 2009 year or $14,000 if age 50+. In addition there is a maximum 3% employer contribution.

A disadvantage of this plan is relatively low maximum annual contribution limits, and loans are not permitted.

In conclusion if you are self-employed and looking for a retirement plan take into consideration the amount you believe you will contribute, and leave room for a potential increase in your contribution that you may decide to make. Also, review the tax implications of each plan, and keep in mind the set up and administrative aspect.

If You’re No Longer With Your Company Then Your Retirement Savings Plan Shouldn’t Be Either

November 28, 2009 by  
Filed under Retirement-Planning

Announcements about the rising unemployment rate, company layoffs and massive corporate cutbacks continue to weigh down the American economy. The Bureau of Labor Statistics reported the national unemployment rate has risen to 10.2%. United States residents are undoubtedly scared, and many have had to think about their financial strategy if they were to find themselves jobless. For the millions of Americans who have already been laid off or forced to retire early, they’ve had to, almost immediately, make decisions regarding what they will do with their company retirement savings accounts.

People spend years contributing money to their IRAs and 401(k)s with the anticipation of not having to touch it until they are ready to retire. It’s tough economic times like these when people find themselves in a financial dilemma and their initial retirement strategy goes awry. The temptation of taking funds out of a retirement account becomes a convenient solution to a poor financial situation. More times than not, individuals using their retirement savings as their emergency savings fail to realize the potentially significant liabilities and serious consequences an early withdrawal can have on their financial, and more specifically, retirement futures.

For the working individuals, fortunate enough to have a steady income, it is best to be prepared and have a game plan for what you would do with these types of accounts if unexpectedly, became unemployed.

1) Understand Loans & 401(k)s

A 401(k) loan must be paid back (with interest) within 60 days of employment termination. Defaulting will result in additional tax liabilities and penalties. Monies withdrawn as loan, no longer grow for retirement. 401(k) loans are not transferable and cannot be rolled over to another plan.

2) Understand Your Current Account Value

On average, 401(k) account balances declined 18% in 2008, with reports as high as double, or more, in total account value loss for Americans across the country. Since these contributions were done “pre” income tax, rolling over a 401(k) now, at a reduced account value, does not provide any tax credit. Since no taxes were paid on the amount contributed to the account in the first place, there is no tax break for “realizing” the loss through account reallocation or rollover.

3) Review Your Options

• Rollover to New Plan. If you intend to find additional work, consider rolling over your 401(k) into the new company sponsored plan and take advantage of any benefits the new employer may offer, such as fund matching.

• Traditional IRA. Funds within a traditional IRA can be invested in a variety of ways, this account allows for tax deductible contributions. Withdrawals can begin by age 59 ½ without penalty, however before 59.5 there is a 10% early withdrawal penalty on the amount taken prematurely. Withdrawals from IRAs are mandatory by 70.5, even if the money is not yet needed for retirement living. Taxes are paid on the withdrawal amounts.

• Roth IRA. No mandatory distribution age, all earnings and principal are 100% tax‐free and funds within a Roth IRA can be invested in a variety of ways. Although contributions to a Roth IRA are not tax deductible, paying taxes on the amount invested today may prove to be profitable decision, as tax rates are likely to increase in the future. Although there are income restrictions for Roth conversions, available only to single filers making up to $95,000 or married couples earning a combined maximum of $150,000 annually, starting next year in 2010, these restrictions are lifted.

4) Understand HOW to Rollover

To avoid costly penalties and taxes, the conversion must be “qualified” and direct, this will help you avoid the 20 percent withholding trap. To have a “direct” transfer, do not take the account distribution in your name. The company will hold 20 percent for taxes and if you are under the age 59 ½, there will be a 10 percent penalty fee as well. Arrange for a “trustee to trustee” rollover with a bank or brokerage house. You must notify your former employer’s retirement plan administrator that you are making a direct rollover, and you must deposit the funds in the rollover IRA within 60 days.

5) Invest for Your Success

There are several investment options ranging from “conservative” to “aggressive” within a retirement savings plan. Be sure your retirement investment portfolio reflects your risk tolerance, level of comfort in investing and time horizon to retirement.

Facing unemployment, a layoff, or a financial hardship is always going to cause a great deal of stress, and the thought of having to make important financial decisions during these difficult times may can be overwhelming. It is always in your best interest to stay on top of your money and to ask lots of questions to gain a solid understanding of all of your options before making any financial decisions. You must do your homework. By staying involved and informed throughout the process, you can avoid paying taxes and fees when changing or moving these types of retirement accounts, as well as reduce unnecessary exposures to risks.

Getting Back on Track – A Retirement Account Recovery Action Plan

November 28, 2009 by  
Filed under Retirement-Planning

Just one year ago the American economy took a turn for the worse, and ever since many individuals have been experiencing financial difficulties, especially in the realm of retirement saving.

This is one of the largest market breakdowns since the Great Depression, and retirement accounts have taken a tremendous tumble, but now is not the time to sit idle and watch your retirement account dwindle. It is time for individuals to wake-up and take action to get their retirement accounts back in line.

“Fear” seems to be the number one cause of inaction among American retirement savers. With a lingering unstable economy, retirement savers just don’t know what to do. They’re worried about a laundry list of things and they need help understanding how to move past the troubles of today to continue to save for tomorrow.

There are three most common concerns regarding retirement planning these days and individuals need insight on how to resolve these worries, scale back the impact the economy has on one’s retirement accounts, and get back on track towards reaching your retirement savings goals.

Concern #1: Recouping Losses

It is a fact that retirement account values are down. Kiplinger’s Personal Finance reported that in 2008, more than 40 percent of workers in the United States saw their 401(k) account balance drop by 30 percent or more. This change toward the negative is definitely a cause for concern, but that doesn’t mean that you definitely won’t be able to retire on time. There are ways to recover from these dramatic drops in retirement account values. Depending on what your intentions for money in retirement accounts may be, income or inheritance, there are a few tips you can use to regain account value. Consider the following:

Good for almost all retirement accounts and all purposes:

· Change up your retirement strategy – Regardless of your intentions, with all the fluctuations in the market over the past year, an evolution of your retirement savings strategy needs to take place if it hasn’t already.

· Evaluate your risk tolerance – While younger investors have the time to ride the fluctuations in the stock market, those approaching or already in retirement should not have more than they can afford to lose in the markets. Be sure your investment strategy matches your investment objectives and your timeline towards retirement; if the money is earmarked for retirement and your soon-to-be future financial safety, then be sure the funds are safely and wisely invested.

If you will definitely need the money in retirement, consider:

· Rearranging the investments within a retirement plan – find a type of investment that is either faring better or holds less risk in order to not lose more money earmarked for retirement. Remember, if you’re down 50 percent in your account value, you will need to recoup 100 percent to break even.

· Incorporating alternative investments – If you do not have a lot of time left until retirement consider some investment alternatives such as municipal bonds, CDs and fixed annuities which offer low risk growth.

If you intended to leave your retirement savings as an inheritance:

· Consider buying life insurance – As a quick solution to getting money intended for family back, consider a life insurance policy. A life insurance policy can bring account values to pre-loss values or higher, and there are certain tax advantages that come with a life insurance inheritance versus an investment inheritance. To learn more, speak to a qualified life insurance representative.

Concern #2: Outliving Savings

It is hard to enjoy retirement if you are living in fear of running out of savings, but in light of the changes in the economy and the ups and downs of the market, the pre-retired and retired are finding their retirement accounts are coming up short. In many cases after having to delay or postpone retirement, people have realized they need to address savings shortcomings sooner rather than later to get caught up and meet their needs for retirement. To ensure your nest egg goes the distance, consider the following tips:

· Know how much you’ll need for income in retirement – A good estimation is that you will need 70 percent of your annual yearly income for each year you are retired. Be sure to factor in inflation, which has averaged 3 percent over the last 20 years.

When you’re done crunching the numbers, keep your overall savings target in mind and be aware of how near or far from that goal you are at all times to avoid outliving your savings.

· Know your monthly income – Try to keep track of all possible sources of income in retirement, however small they may be, in order to get an accurate figure for what you’ll be taking in each month. Common sources of retirement income include Social Security, retirement pensions and savings. After you’ve calculated this number see how much of a difference you’ll have to make up to hit your goal of 70 percent.

· Catch-up where you can – If you are lagging behind, consider catching up your savings with a catch-up contribution in your retirement plan. This provision allows anyone 50 or older to contribute extra money into a retirement account. The 2009 maximum contribution amounts for an IRA holder are $5,000 this year, and if you turn 50 in 2009 or older, you can take advantage of the IRS catch-up provision of $1,000 extra, bringing your maximum IRA contributions to $6,000 per year. Contribution limits for 401(k) plans depend on income and age, check with your financial advisor or plan administrator to determine the specific provisions.

Concern #3: Minimizing Taxes

It’s hard not to worry about taxes – they are a prevalent part of American society and are virtually unavoidable, which is why many Charlotte residents are concerned that taxes will go up and eat away at their retirement savings in the future. This concern is valid as taxes on retirement accounts can be a huge burden. To mitigate your tax liabilities in retirement, consider the following:

· Evaluate the tax advantages of your different retirement savings accounts – Create a plan for how and when you’ll withdraw funds for retirement from each account type, also known as income planning. By being strategic in your distributions, you can save money in taxes and fees as well as allow for continued growth in well performing savings accounts.

· Review your current retirement savings account – Not all retirement accounts offer the same tax benefits, so you may need to consider changing your retirement account type depending on how and when you are going to need the money in retirement. If you’re concerned about rising taxes, you may want to consider a rollover to a Roth IRA. Tax benefits of a Roth include:

· Not having to pay taxes when (and if) you decide to withdraw your savings (because taxes are paid when you contribute funds, not upon withdrawal).

· Monies earned on the principal in a Roth IRA grow tax-free, meaning they will retain their value better than a traditional IRA or 401(k) that will be subjected to taxes.

· The absence of a Required Minimum Distribution – 70 ½ is the mandatory age by which you must begin taking funds out of a retirement account. This can be helpful if you don’t need your retirement funds right away or would like to leave the money in the account as a “stretch” IRA to give to your family when you pass.

In this market, being afraid and doing nothing won’t get you anywhere. Overcoming worries and getting a good grasp on retirement accounts is the only way to pull yourself out of the economic black hole and get back on track to retirement saving.

Chris Hobart is founder and president of Hobart Financial Group, Inc., an independent financial advisory firm based in Charlotte, North Carolina. As a retirement planning and 401(k) rollover specialist, Hobart assists individuals with the transition into retirement. Hobart is a Registered Financial Consultant (RFC?), Investment Advisor Representative (IAR), and Chartered Senior Financial Planner (CSFP). In 2008, Hobart was named as one of the nation’s top independent financial advisors and was a finalist for Senior Market Advisor Magazine’s “Advisor of the Year” because of his commitment to excellence as a leader in the retirement planning profession and within the Charlotte community.

QROPS – Compare Overseas Pension Transfer Providers

November 28, 2009 by  
Filed under Retirement-Planning

In April 2006, it was announced that British expatriates could move their pension benefits to a Qualifying Recognised Overseas Pension Scheme (QROPS) with the Revenue’s approval. If structured in this way, transferring pension benefits via a QROPS can have huge benefits: The individual can take 25% (30% in some jurisdictions) of their pension’s value as a tax-free lump sum at any time after the age of 50 (this increases to 55 for any transfers which have not been completed by April 2010).

Beware, there are some companies offering to unlock 100% of the cash of existing UK Pensions. These schemes are not approved By HMRC and there are real dangers for your wealth, not only might you end up with a scheme that gets banned, you could end up with no investment return and even a fine from HMRC!

With QROPS the individual is free to do whatever they want with the released benefits. Some may choose to hold the money in a high interest offshore bank account which returns more than an annuity and is tax-free whilst they are resident outside Europe.

Others many choose to invest in an offshore bond or capital protected offshore investment with the view of getting even better returns. Here they have access to an entire universe of funds that cover all asset classes and market sectors; this alone ensures the returns have every chance of outperforming UK based pensions. Others may use the money to purchase a property with the rental income returning more than an annuity would and, hopefully there would be some capital gain as a bonus.

Whatever your circumstances whether you are retired or still working it is important to seek all the information you need to make an informed decision since transferring UK pensions is not suitable for all. For this reason people should ensure they use qualified advisers that can provide sound advice and have access to both approved QROPS and SIPPS schemes.

Using QROPS specialists that can free your UK Pension is just the beginning; they can also help by doing the research and finding the investment funds best suited to your circumstances.

Once you have found a suitable pension adviser the actual transfer process can begin. These pension specialists will guide you through all the correct procedures, once they have obtained the actual transfer values the pension team will vet your existing pensions to see if it is appropriate to transfer them or not. Assuming there is a benefit in transferring to a new scheme they will then ensure a smooth transfer of your hard earned pensions.

Offshore pensions can be highly beneficial to expatriates and anyone contemplating living or retiring abroad.

QROPS Main benefits include:

  • Never purchase a UK annuity.
  • Take a 25% tax free cash sum
  • Leave all unused pension to your beneficiaries
  • Choice of investment funds located offshore
  • Take income tax free or massively reduced rates of tax
  • Applies to any expat or anyone with a UK pension -release yours now.

Don’t move forward with any company that can’t provide you with 100% HMRC approved schemes, make sure their advisers are experts within their field and make sure they are independent of any institution.

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