Many of us have the urge to take our futures into our own hands. Rather than look for a conventional job, we strike out on our own and start a business. While this is an exciting and sometimes frightening idea, we need to keep our retirement plans in focus.
To do this, you will need to consider a great number of options. The sole proprietorship, the small business of choice for the vast majority of us offers the retirement planner a great deal of latitude.
To find out just what options this sort of plan offers, visit our sister site Target2025.com for the answers.
Showing posts with label solo 401(k)s. Show all posts
Showing posts with label solo 401(k)s. Show all posts
Wednesday, January 27, 2010
Monday, June 1, 2009
SIMPLEs and UNI-DBs for Small Businesses
When the tax laws were written for small businesses, they were often much more generous. For instance, an employer with only him/herself as an employee can save enormous amounts of money for their retirement - far more than the employee or business owner at a much larger company.
Today we discuss the SIMPLE IRA and the Solo or Uni Defined Benefit Plan for small business in the last of our three part series.
The SIMPLE IRA, named because those letter stand for savings incentive match plans for employees, are a much cheaper and far less complicated way for small employers to establish and administer than a traditional 401(k).
But these plans can be quite a bit more complicated and require you have help with the legalities. But you will find it well worth it especially if you are earing or expect to earn those sums now and in the near future.
KEOGH plans were put to the wayside with the creation of SIMPLEs. If you still have a KEOGH plan in place, the paper work to rollover the plan is relatively straightforward but still must be done by a plan professional. But I believe that if you do rollover a KEOGH, you, your employees and your retirement future will much better off for the effort.
Today we discuss the SIMPLE IRA and the Solo or Uni Defined Benefit Plan for small business in the last of our three part series.The SIMPLE IRA, named because those letter stand for savings incentive match plans for employees, are a much cheaper and far less complicated way for small employers to establish and administer than a traditional 401(k).
This type of plan is indeed easier to manage and implement but there are a few rules you need to keep in mind before choosing a SIMPLE IRA plan for you and your employees. You are required to make a contribution for every worker who receives $5,000 or more in compensation. It doesn't have to be a lot but it has to be something up to but not exceeding $11,800 for the calendar year 2009.
The contributions may resemble an employer match, just like those used when larger companies match employee contributions to their defined contribution plans (401(k)) But the employee must first elect to contribute to the plan themselves and your match to their contribution can not exceed 3% of their salary.
Employers may also choose to make the contribution on the employees behalf, contributing up to 2% of each worker's wages, whether the worker contributes to the plan or not. This "non-elective" mandatory company match of 2% is required to be made on behalf of every employee.
Aside from the fact that the plan cost less to administer, the strings that tether the SIMPLE IRA might not be right for you or your company.
SIMPLEs have a built-in special tax penalty of 15% that is added to the 10% early withdrawal penalty for SIMPLE IRA withdrawals made within the first two years of opening a SIMPLE plan. Although your retirement plan should not be considered a source of income, this penalty can make it more difficult to access that money in times of dire emergency. (But please, consider every other option first before withdrawing built up investments in these plans.)
Because of that string, a SIMPLE IRA can be much less flexible than a 401(k) plan for the average small business. Keep in mind the following while considering this type of plan. Will you be the only employee? If so, a Solo 401(k) might be best. If you are planning to grow your business slowly, adding employees on as needed, you should consider that contribution requirement. An employer must make contributions for all eligible employees and while they are doing so, no contributions can be made to other qualified retirement plans.
The contributions you make to the employees plan belong to the employee immediately after they are posted. This immediate vesting can be troublesome for some seasonal type of employers who do not expect to retain employees or demand their loyalty for a long period of time.
Should you as an employer decide to end the plan, you must wait until the calendar year is completed and while you are waiting, you are obligated to continue with payments to the employee's plan. And here is something else you should consider: no loans are allowed.
But these plans can be quite a bit more complicated and require you have help with the legalities. But you will find it well worth it especially if you are earing or expect to earn those sums now and in the near future.
KEOGH plans were put to the wayside with the creation of SIMPLEs. If you still have a KEOGH plan in place, the paper work to rollover the plan is relatively straightforward but still must be done by a plan professional. But I believe that if you do rollover a KEOGH, you, your employees and your retirement future will much better off for the effort.
| FEATURE | Solo or Self Employed 401K | Solo-DB | SEP-IRA |
| Eligibility | One person only. (Multiple owners and spouses allowed, but no other employees) | Business owner and up to 4 employees | No limit on number of employees. (most organizations |
| Key Features | Low Cost Contributions to plan are discretionary. IRS form 5500-EZ filing required for balances over $250,000 Roth 401k feature | Annual Fees Offers the largest tax- Mandatory contributions for at least 5 years
| Very Low cost Contributions to plan are discretionary. contributions are made for one employee they must be made by the employer for all eligible employees
|
| Loans | Loans are allowed | Loans are allowed | No Loans |
| Contribution Limits * | See Self Employed Owner Only Calculator or Contribution limits for max contribution limits. | ||
| Deadline to open plan | December 31 or End of company’s fiscal year | December 31 or End of company’s fiscal year | Up to time of tax filing |
| Deadline to contribute to plan | Employer | Employer contributions must be made by the employer's tax filing deadline plus extensions | Before the employer's tax filing deadline plus extensions |
Tuesday, May 26, 2009
Retirement Planning: Your Business Plan for Retirement part one
Those of us who write about personal finance will, almost by default attempt to explain your personal finances, even your marital finances, as a business endeavor. And as truthful as those analogies might be, it still doesn't prepare you for your own business. If the entrepreneurial spirit is truly alive, then chances are you have given some thought to opening your own business.
More than the business plan is needed. More than just that great idea; the one that you know is just what some consumer somewhere cannot live without. More than just that spirit of being your own boss. More than the freedom to call the shots, be the builder of your own destiny. Being in business for yourself is a huge risk against your retirement.
Your reliance on your skills will sap the very lifeblood out of you, leaving you thrillingly exhausted at the end of each day. It will be great and terrifying, all at the same time. And many of us will fund that venture with money that may not come directly from your previous employer's 401(k) - at least I hope not - but from money you could have put away for that future.
There is a way to not lose out on that future as long as you apply some of the principles that guided your retirement plan before you struck out on your own. And if you tapped those funds, there are ways to recoup those lost dollars quickly.
But you have got to act fast. Right from the beginning. Without a doubt, you will need a salary from your business. And just like when you had that other job, the one with the 401(k), you should account for a pre-tax retirement contribution.
There are several ways to get going. First, we will discuss the easiest one to set up. In the next post, we will talk about other plans to think about as your business grows.
The solo 401(k) is for a sole proprietor, a business of one. It was created for people with great ideas, folks like you Your business can have a spouse for an employee but generally, the self-employed, the entrepreneur, the small business owner must go it alone. The good thing about solo 401(k): simplicity.
Simple to use and easy to maintain, you may contribute up to $13,000 of tax-deferred income with a bonus incentive thrown in for good measure in allowing you to add up to 25% of profit from your business as well. You might be living on tuna and crackers, but this type of plan can allow the start-up business owner the advantage of playing 401(k) catch-up in a relatively short time. The contribution limit is $41,000.
The relaxed rules that come with a solo 401(k) offer you the ability to decrease your contribution or suspend it altogether. By try not to. Because other rules in the plan might come in handy during some rough spots in your business's future. Known as hardship withdrawals, these loans against your solo 401(k) often have more favorable terms than those plans administered by larger enterprises. You might, at some point in time consider rolling over your previous 401(k) into your new plan.
Yet, like everything that seems too good to be true, there are a few drawbacks to the to the solo 401(k).
First, you need to find a plan administrator. Typically, these might be mutual fund managers but not always. The fund families are generally less expensive (trust and equity companies can charge anywhere from $400 upward to set up the account, and an additional percentage or fixed fee on the balance of the account) costing about ten dollars to set-up the account and 0.25% against the account balance, it may on the surface seem like a no-brainer to chose these folks. But the funds they offer you may add additional costs to the account in the way of fees and some fund families, like Fidelity want $10,000 upfront to begin with any fund.
Here is a list of plan administrators (a downloadable pdf.).
You should also consider your business's growth potential. If its quick, and you anticipate hiring employees, setting this kind of plan up may be a waste of time. Once your solo 401(k) is set up and your business grows, you will need to transition to a traditional 401(k) sooner than you would have liked to - or had the time to.
If you do anything, keep this in mind: this is a taxable event and should have the stamp of approval on it from someone who is a professional. Find a good one through references or very good friends.
Next up, the SEP-IRA.
More than the business plan is needed. More than just that great idea; the one that you know is just what some consumer somewhere cannot live without. More than just that spirit of being your own boss. More than the freedom to call the shots, be the builder of your own destiny. Being in business for yourself is a huge risk against your retirement. Your reliance on your skills will sap the very lifeblood out of you, leaving you thrillingly exhausted at the end of each day. It will be great and terrifying, all at the same time. And many of us will fund that venture with money that may not come directly from your previous employer's 401(k) - at least I hope not - but from money you could have put away for that future.
There is a way to not lose out on that future as long as you apply some of the principles that guided your retirement plan before you struck out on your own. And if you tapped those funds, there are ways to recoup those lost dollars quickly.
But you have got to act fast. Right from the beginning. Without a doubt, you will need a salary from your business. And just like when you had that other job, the one with the 401(k), you should account for a pre-tax retirement contribution.
There are several ways to get going. First, we will discuss the easiest one to set up. In the next post, we will talk about other plans to think about as your business grows.
The solo 401(k) is for a sole proprietor, a business of one. It was created for people with great ideas, folks like you Your business can have a spouse for an employee but generally, the self-employed, the entrepreneur, the small business owner must go it alone. The good thing about solo 401(k): simplicity.
Simple to use and easy to maintain, you may contribute up to $13,000 of tax-deferred income with a bonus incentive thrown in for good measure in allowing you to add up to 25% of profit from your business as well. You might be living on tuna and crackers, but this type of plan can allow the start-up business owner the advantage of playing 401(k) catch-up in a relatively short time. The contribution limit is $41,000.
The relaxed rules that come with a solo 401(k) offer you the ability to decrease your contribution or suspend it altogether. By try not to. Because other rules in the plan might come in handy during some rough spots in your business's future. Known as hardship withdrawals, these loans against your solo 401(k) often have more favorable terms than those plans administered by larger enterprises. You might, at some point in time consider rolling over your previous 401(k) into your new plan.
Yet, like everything that seems too good to be true, there are a few drawbacks to the to the solo 401(k).
First, you need to find a plan administrator. Typically, these might be mutual fund managers but not always. The fund families are generally less expensive (trust and equity companies can charge anywhere from $400 upward to set up the account, and an additional percentage or fixed fee on the balance of the account) costing about ten dollars to set-up the account and 0.25% against the account balance, it may on the surface seem like a no-brainer to chose these folks. But the funds they offer you may add additional costs to the account in the way of fees and some fund families, like Fidelity want $10,000 upfront to begin with any fund.
Here is a list of plan administrators (a downloadable pdf.).
You should also consider your business's growth potential. If its quick, and you anticipate hiring employees, setting this kind of plan up may be a waste of time. Once your solo 401(k) is set up and your business grows, you will need to transition to a traditional 401(k) sooner than you would have liked to - or had the time to.
If you do anything, keep this in mind: this is a taxable event and should have the stamp of approval on it from someone who is a professional. Find a good one through references or very good friends.
Next up, the SEP-IRA.
Subscribe to:
Posts (Atom)