Archive for May, 2016

Navigating Retirement When You’re Self-Employed

Monday, May 23rd, 2016

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Being self-employed has its ups, but it can also have its downs. For one, there may be enormous business costs to worry about, and you likely have to finance your retirement account entirely on your own. Fortunately, there are a number of self-employed retirement plans that can help you save enough for retirement.

In fact, these specialized plans allow you to save significantly more than you could with traditional retirement accounts. That’s because self-employed workers typically don’t have the employer contributions and match benefits that many traditionally employed workers enjoy. By contributing to one of these accounts, you can save a ton in taxes this year with an upfront tax break and tax-deferred growth.

SEP IRA

The Simplified Employee Pension (SEP) IRA plan is similar to a traditional IRA, but does not have the high start-up or operating costs of a conventional retirement plan. Instead, there are low administrative costs, and the plan is simple to operate. Any contributions you make to your SEP IRA are with pre-tax funds. You will be required to take a minimum distribution at age 70 ½.

The maximum contribution amount for an SEP IRA is $53,000 per year ($59,000 if you’re age 50 or older), or 20% of your net earnings from self-employment.

Contributing to your SEP IRA can lower the amount of income you pay taxes on now. Once you retire, your withdrawals will be taxed at your ordinary income tax rate. If you make withdrawals before age 59 ½, there will be an additional 10% early withdrawal penalty fee added. You may also be eligible for a tax credit of up to $500 per year for the first three years to cover the cost of starting the plan.

SIMPLE IRA

The Savings Incentive Match Plan for Employees (SIMPLE) IRA Plan allows both the employee and employer to contribute. Contributions are on a pre-tax basis, and you will be required to take a minimum distribution at age 70 ½.

The maximum contribution amount for a SIMPLE IRA is $12,500 per year, $15,500 if you’re age 50 or older, plus an employer contribution of 3% of income.

Contributing to your SIMPLE IRA can lower the amount of income you pay taxes on now. Once you retire, your withdrawals will be taxed at your ordinary income tax rate. If you make withdrawals before age 59 ½, there will be an additional 10% early withdrawal penalty fee added. The penalty is 25% if you make withdrawals within the first two years of participating in the plan.

Individual or Solo 401K

This is very similar to a traditional 401K plan, with lower maintenance charges. Any contributions you make to your self-directed 401K plan are with funds you haven’t been taxed on yet. You will be required to take a minimum distribution at age 70 ½.

The maximum contribution amount for an Individual or Solo 401K is $18,000 per year ($24,000 if you’re age 50 or older). With a profit sharing contribution, business owners can contribute up to 20%–25% of the business earnings. The total contribution limit is $53,000 per year ($59,000 if you’re age 50 or older).

Contributing to an Individual or Solo 401K plan can lower the amount of income you pay taxes on now. Once you retire, your withdrawals will be taxed at your ordinary income tax rate. If you make withdrawals before age 59 ½, there will be an additional 10% early withdrawal penalty fee added.

What’s Right for You?

If you aren’t sure about which self-employed retirement account is right for you, consider speaking with a financial adviser. They can help you make informed decisions based on your financial situation and retirement goals.

Don’t Wait to Sign Up

Don’t wait any longer to start investing. The sooner you get your retirement plan going, the sooner you can begin taking advantage of compound interest. (Visit the IRS’ website for information on how to set-up one of these plans.) Most self-employed workers claim that their lack of preparation for retirement is due to their limited budget. However, nearly all retirement experts agree on one thing: It doesn’t matter how much you’re saving for retirement, as long as you’re saving.

Is Owning Gold as an Investment Option Still “Standard”?

Monday, May 16th, 2016

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There are two schools of thought regarding gold: One advocates owning gold as a hedge against inflation, a weakening dollar, and stock market disaster. The other camp argues the yellow metal has no role in a modern portfolio, according to some investment experts.

There is an argument for caution, when gold prices are volatile, and the market is moving quickly and dramatically, often with no warning. In April 2013, gold plunged 13% in two trading days and ended the year down nearly 28%.

For all its shortcomings, gold shines when the outlook for other assets looks bleak, because in 2002, when U.S. stocks plunged 22%, gold gained 24%. Gold was one of the few assets that ended 2008 in positive territory, and it swelled 28% in 2009 and again in 2010. Proponents of gold argue that owning the metal is a relatively inexpensive insurance policy.

If you decide you really want to own it, gold presents another quandary:How should you own it?

Here too experts don’t all agree. The purest way to own gold is via bars or coins, but dealers charge a premium, the price isn’t always tied to gold’s market value, and there’s also the issue of storage. If you pay a third party to hold the coins for you, there are added fees. If you store your gold in a safe at home, you face additional risks.

A gold-backed IRA is one form of a precious metals IRA, which have been around for decades. You can opt to fund your IRA with precious metal, but only certain metals are allowed, namely, gold, silver, platinum, and palladium.
There are a few things that make a gold-backed IRA different from other plans. For starters, these IRAs are self-directed, so that means you make the decision as the account holder. And second, your gold is stored in a facility by your chosen IRA custodian.

Many experts recommend another modern approach: Buy an exchange-traded fund that is backed by actual gold. The largest such fund, the SPDR Gold Trust, says it stores gold owned by the fund in London vaults of its custodian, HSBC Bank. The advantages of going this route are liquidity—you can buy and sell shares quickly—and cost.

How to Keep your Student Loans from Preventing Retirement Savings

Monday, May 9th, 2016

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When it comes to taking out loans for college, the common marketing pitch is that you are investing in your future. However, this investment may prevent you from putting money aside for your retirement, which is a literal investment in your future. What can you do to make sure that paying down your student loans doesn’t prevent you from putting money away for retirement?

Student Loan Debt Can Impact You For Years

Student loans can impact your life at any age. If your graduated at age 21, you could be paying off your debt until you are 45 or older depending on how often you delay payments. Some people decide to go back to school later in life or even help their kids or grandchildren pay for school. In that scenario, student loans could prevent retirement itself as well as saving for it. This is why it is important to understand how to save despite facing tens or hundreds of thousands of dollars of outstanding loans. Remember, loans used to pay for school generally cannot be discharged in bankruptcy, which means that they can burden you for your entire life if you don’t have a plan to pay them.

Look Into Income Based Repayment Plans

If you have federal loans, you may be able to keep your payments to a certain percentage of your income. Generally, you will be required to pay no more than 10-15 percent of discretionary funds depending on when you first took out your loans. After 20 to 25 years, the remaining balance is forgiven.

Depending on your income, you may owe nothing on your loans during this repayment period. One issue to keep in mind is that you will owe income tax on any forgiven balance in the year that the balance is forgiven. However, in the meantime, you can use the money that you would have spent paying student loans toward your retirement instead.

Make Interest Only Payments

Another option may be to make interest only payments for several months or years after your graduate. While you will still be responsible for paying your balance at some point, you will have time to save for retirement today and worry about your balance when you have more money to put toward paying down your debt. If you like, you can make partial principal payments to keep your overall debt under control while still allocating some funds for later in life.

Put Bonuses Toward Your Retirement Account

If you get a bonus, you may want to consider putting that directly into your retirement account. In some cases, your employer may actually match your contribution. Additionally, it may reduce the tax burden that you would otherwise face as bonuses may be taxed differently depending on your financial situation. Putting bonuses toward retirement may also help encourage you to save on a regular basis due to accelerated compounding. As you see your savings grow, you can’t help but want to make your account grow even faster.

Never Put Student Loan Payments on a Credit Card

While you may be able to make student loan payments with a credit card or transfer your balance to a credit card, it is a terrible decision. For the most part, you still can’t discharge the debt through bankruptcy, and you will pay a higher interest rate on the debt balance. This means that you could be increasing the amount that you owe instead of paying it down over time. Although charging your payments may provide you with extra cash to put into a 401k, the compounding will generally be less than the interest your paying on your card.

Student loans are a burden that most of us will face for years to come. However, don’t let that stop you from saving for retirement. Looking into income based plans or putting bonuses into your retirement account can help you preserve your financial future even if the present doesn’t look at rosy.

Getting the Most out of Your Retirement Savings

Monday, May 2nd, 2016

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One of the biggest worries that prospective retirees have is running out of money. But, what most of those people don’t know is that there are options, lots of options to protect yourself, and have a prosperous and full retirement. Here are a couple strategies that help you.

Deferred annuities

A deferred annuity is similar to an IRA, in that you set up an account with a company who offers annuities, you will select variable rates, fixed rates, longevity annuity, etc. You hand over some or all of your savings into the annuity, and your annuity company then will write you a check every month to supplement your retirement income for the rest of your life. There are even more options inside that, you can setup your account so that you don’t see your annuity checks until you’ve reached a certain age, so that you never run out of money well into your retirement.

A retirement income plan

One of the first things to do when contemplating retirement is to develop a retirement income plan. This is where you need to envision how you see your retirement and what your savings will need to be in order to satisfy the lifestyle you desire. Many retirees spend the first ten years of their retirement traveling and taking advantage of their hobbies. Some retirees will also want to have the ability to help pay for their grandchildren’s education or help their own child purchase a home. These things all cost money and the pre-retiree will need to factor that into their retirement plan.

Income-producing investments

When we think retirement income it is important to think along the lines of pension funds. Pension funds are ideal for investing to produce income and preserve principal. When planning for a successful retirement, you ideally want to move from growth-type investments (a good choice for people in their 30s and 40s) to income producing investments (such as a self-directed IRA in real estate, or a startup). Income producing assets produce a steady stream of income, and while there is some opportunity for growth, you have peace of mind with your income, should the stock market take a dip.

Consider lower your taxes

Instead of looking at your investments first, begin by taking a look at your taxes and figure out the best way to minimize them. This is not “cheating”, but rather, making sure you are not paying more than you need to at tax time. For example, many people own mutual funds that unbeknownst to them, spin off distributions which cause them to pay taxes. By simply changing your portfolio’s funds to more tax efficient funds, these distributions won’t hit your taxes and negatively impact your bottom line, leaving more money in your retirement fund.

Figuring out how much money you will need to retire comfortably and whether you are on track (i.e. are you saving enough?) are two critical questions to ask in the planning process. You might want to consider joining forces with a trusted financial advisor who can deliver a complete picture of your assets and assist you with your retirement plan.
With these four strategies in place, you can maximize your retirement income and ensure that your retirement is designed the way you want it to be!