SEP-IRA Archives - The Chicago Financial Planner

Small Business Retirement Plans – SEP-IRA vs. Solo 401(k)

February 5, 2023 by Roger Wohlner 41 Comments

One of the best tax deductions for a small business owner is funding a retirement plan. Beyond any tax deduction you are saving for your own retirement. As a fellow small businessperson, I know how hard you work. You deserve a comfortable retirement. If you don’t plan for your own retirement who will? Two popular small business retirement plans are the SEP-IRA and Solo 401(k).

SEP-IRA vs. Solo 401(k)

	SEP-IRA	Solo 401(k)
Who can contribute?	Employer contributions only.	Employer contributions and employee deferrals.
Employer contribution limits	The maximum for 2022 is $61,000, this has been increased to $66,000 for 2023. Contributions are deductible as a business expense and are not required every year. A SEP-IRA can be opened and funded up to your business tax filing date, including extensions.	For 2023, the employer and employee combined contribution limit is a maximum of $66,000 and $73,500 for those who are 50 or over, respectively. Employer profit sharing contributions are limited to a maximum of 25% of the employee’s compensation. They are deductible as a business expense and are not required every year.
Employee contribution limits	A SEP-IRA only allows employer contributions. Employees can contribute to an IRA (Traditional or Roth, based upon their individual circumstances).	Employee contribution limits are $22,500 for 2023. An additional $7,500 catch-up contribution is available for participants 50 and over. In no case can total employee contributions exceed 100% of their compensation.
Eligibility	Typically, employees must be allowed to participate if they are over age 21, earn at least $600 annually, and have worked for the same employer in at least three of the past five years.	No age or income restrictions. Business owners, partners and spouses working in the business are generally eligible to contribute. Common-law employees are not eligible.

Note the Solo 401(k) is also referred to as an Individual 401(k).

While a SEP-IRA can be used with employees in reality this can become an expensive proposition as you will need to contribute the same percentage for your employees as you defer for yourself. I generally consider this a plan for the self-employed.
Both plans allow for contributions up your tax filing date, including extensions for the prior tax year. Consult with your tax professional to determine when your employee contributions must be made. The Solo 401(k) plan must be established by the end of the calendar year.
The SEP-IRA contribution is calculated as a percentage of compensation. If your compensation is variable the amount that you can contribute year-to year will vary as well. Even if you have the cash to do so, your contribution will be limited by your income for a given year.
By contrast you can defer the lesser of $$22,500 and $30,000 (for those who are 50 or over) for 2023 into a Solo 401(k) plus the profit sharing contribution. This might be the better alternative for those with plenty of cash and a variable income.
Loans are possible from Solo 401(k)s, but not with SEP-IRAs.
A Roth feature is available for a Solo 401(k) if allowed by your plan document. Beginning in 2023 the ability to open and fund a Roth SEP-IRA is available as part of the recently passed Secure 2.0 rules. There will likely be some additional guidance on Roth SEPs from the IRS to come.
Both plans require minimal administrative work, though once the balance in your Solo 401(k) account tops $250,000, the level of annual government paperwork increases a bit.
Both plans can be opened at custodians such as Charles Schwab, Fidelity, Vanguard, T. Rowe Price, and others. For the Solo 401(k) you will generally use a prototype plan. If you want to contribute to a Roth account, for example, ensure that this is possible through the custodian you choose.
Investment options for both plans generally run the full gamut of typical investment options available at your custodian such as mutual funds, individual stocks, ETFs, bonds, closed-end funds, etc. There are some statutory restrictions so check with your custodian.
For those wishing to invest in alternative assets inside of their SEP or solo 401(k), a number of self-directed retirement plan custodians offer this option.

Both plans can offer a great way for you to save for retirement and to realize some tax savings in the process. Whether you go this route or with some other option I urge to start saving for your retirement today.

Self-employed? You need to start a retirement plan today.

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Approaching retirement and want another opinion on where you stand? Not sure if your investments are right for your situation? Need help getting on track? Check out my Financial Review/Second Opinion for Individuals service for detailed guidance and advice about your situation.

FINANCIAL WRITING. Check out my freelance financial writing services including my ghostwriting services for financial advisors.

NEW SERVICE – Financial Coaching. Check out this new service to see if it’s right for you. Financial coaching focuses on providing education and mentoring on the financial transition to retirement.

Please contact me with any thoughts or suggestions about anything you’ve read here at The Chicago Financial Planner. Don’t miss any future posts, please subscribe via email. Check out our resources page for links to some other great sites and some outstanding products that you might find useful.

Photo credit Flickr

Filed Under: Retirement Plans Tagged With: 401(k), Financial Planning, Mutual fund, retirement, Roth, SEP-IRA

5 Reasons to Consider a Solo 401(k)

November 27, 2022 by Roger Wohlner 13 Comments

For those of you who are self-employed it is important that you save for your own retirement. Building a business is hard work. For business owners who work solo, or who have a spouse and/or a partner in the business with them, a Solo 401(k) may be the right option. Here are five reasons to consider a Solo 401(k).

High maximum contributions

For 2022 the maximum contribution limits are $61,000 and $67,500 for those who will be 50 or over in 2022. For 2023 these limits increase to $66,000 and $73,500. This includes the regular employee 401(k) contribution limits for 2022 of $20,500 and $27,000 for those 50 and over. For 2023 these contribution limits increase to $22.500 and $30,000, plus the employer-funded profit sharing component in both years.

The profit sharing portion can range up to 25% of income, though sole proprietors may be limited to 20% due to the nature of the calculation used to determine their contributions. Check with your financial or tax advisor as to how much you will be able to contribute.

Investment flexibility

A Solo 401(k) can be opened at many popular custodians such as Schwab, Fidelity, Vanguard, T. Rowe Price, and many others. Some self-directed retirement account platforms allow Solo 401(k)s as well. Just like an IRA or a SEP-IRA, you can invest in a range of investment options such as mutual funds, ETFs, closed-end funds, individual stocks and bonds or any other investment vehicle that is offered by the custodian that isn’t prohibited by 401(k) rules.

Contribution flexibility

While the high maximum contributions are an advantage for those self-employed individuals with the income and cash-flow to afford them, there is no requirement for you to make a contribution. You can skip a year if need be.

Another form of contribution flexibility is the ability to make the employee contributions up to the maximum as long as you earn enough. Contrast this to a SEP-IRA where the contribution limit is a maximum of 25% of your income. Your contribution amount could be much lower in years when your self-employment income is lower than normal. As long as you have the cash to make the contribution, the Solo 401(k) would generally allow a larger contribution at lower levels of income than a SEP-IRA.

Easy to open and maintain

Most major custodians and brokerage firms welcome these accounts and make the process of opening and funding your account easy. Generally these firms use a prototype plan and there are very few regulatory or administrative requirements until your account balance reaches the $250,000 level.

Roth options are available

Depending upon the custodian you select, a Solo Roth 401(k) option might be available to you. Just like a 401(k) plan with an employer, the Solo Roth 401(k) option allows larger Roth contributions than the Roth IRA limits. For those whose income is too high for a Roth IRA, the Roth Solo 401(k) can be a good option.

If you are interested in opening a Solo 401(k) here are a few things to keep in mind:

In order to contribute to a Solo 401(k) for the current year the account must be opened by December 31. Contributions can generally be made up to the filing date, including extensions, for the business. It’s best to check with your tax or financial advisor regarding the latest date for contributions.
A Solo 401(k) only works for you, a partner, and/or a spouse. If you have employees this is not the vehicle for you. Check with your financial advisor or prospective custodian for more on this.
If you are interested in a Roth feature and/or the ability to take loans from your account, you will want to make sure that the custodian you are considering offers these features. You will also want to inquire about any and all account fees. Note that any trading fees or mutual fund purchase charges that apply to other accounts at the custodian will generally apply here as well.

The Solo 401(k) can be a great self-employed retirement plan. If you are self-employed you need to start saving for your retirement. You work too hard to put this off any longer and if you don’t save for your own retirement nobody else will do it for you.

NEW SERVICE – Financial Coaching. Check out this new service to see if it’s right for you. Financial coaching focuses on providing education and mentoring in two areas: the financial transition to retirement or small business financial coaching.

FINANCIAL WRITING. Check out my freelance financial writing services including my ghostwriting services for financial advisors.

Photo credit: Flickr

Filed Under: 401(k) Tagged With: 401(k), Individual Retirement Account, Mutual fund, retirement, Retirement planning, SEP-IRA

Managing Inflation in Retirement

August 17, 2021 by Roger Wohlner 2 Comments

After many years of historically low inflation rates, it now appears that inflation is back. While inflation hits everyone, it can be especially hard on retirees.

As we begin to emerge from the economic impact of COVID-19, we have begun to see price inflation in a number of areas. Prices of new and used cars are through the roof due to both supply and demand issues. The housing market continues to boom in some areas of the country with prices to match.

The Federal Reserve has done a good job of keeping inflation in check, but there is talk of them reducing some of their efforts in this area. A key indicator that inflation may be back are indictors of a possible COLA increase for Social Security that could range as high as 6.2% for 2022.

An annual inflation rate of 2 or 3 percent over a period of years can seriously erode the purchasing power of your retirement nest egg. At 2.5 percent inflation, $1 today will be worth approximately 78 cents in 10 years, 61 cents in 20 years, and 48 cents in 30 years. This could have a major impact on those entering retirement and those in retirement.

Managing inflation in retirement is crucial, here are some thoughts you need to consider.

Manage all of your retirement resources

Most people have multiple sources of retirement income which might include:

401(k) plans
IRA accounts
Pension from a private employer
Pension from a governmental entity
Taxable investments
Social Security
Health savings accounts
Income from part-time employment
Annuities
Company stock options
Interest in a business
An inheritance

It is important to identify all of these financial resources and to manage them in a fashion to maximize their benefit to your retirement.

Use a conservative inflation rate for planning purposes

Since your retirement is likely to span decades, consider inflation over long time periods. Inflation is running at historically low levels, this won’t last forever. However since World War II inflation has averaged well over 3 percent. Inflation will have a huge impact on your retirement finances, assuming today’s low inflation rate into retirement could be setting you up for disappointment down the road.

Invest to stay ahead of inflation

Your investments should be diversified among various asset classes based upon your risk tolerance, your income needs, your age, etc. That said, don’t be too conservative. While it might be tempting to shy away from risk in retirement, especially given the financial crisis of 2008-2009, for retirees their greatest retirement risk is outliving their money. Being too conservative can easily lead to this. For most investors, a portion of their portfolio should remain invested in stocks, which have typically earned returns in excess of inflation over time.

Make good pension decisions

If you are covered by a pension plan you likely have options as to whether you want to take your benefit as a series of monthly payments over your lifetime or as a lump-sum payment. Either option can be the right choice depending upon your situation. Most corporate pension plans do not offer cost of living increases so your monthly payments will lose value over time in real terms due to inflation. On the other hand, most public and municipal pensions do have cost of living adjustments, though there is no guarantee that future increases will keep pace with actual rate of inflation.

Taking a lump-sum distribution and rolling it over to an IRA assumes that you are comfortable managing and investing this money on your own or that you have a relationship with a financial advisor to help you do it. A properly invested portfolio has the potential to earn enough to keep you ahead of inflation. On the flip side, it’s important to remember that investments can lose money as well.

Make sound Social Security decisions

You are eligible to begin collecting Social Security benefits at age 62. If you opt to take benefits that early your monthly payment will be permanently reduced. If you wait until your full retirement age, age 66 for those born prior to 1960, your monthly benefit will be higher. If you are able to wait until age 70 your monthly payment amount will increase 8 percent for each year that you wait after reaching your full retirement age.

The increases are also prorated, so if you were to commence benefits at say age 65 your benefit would be proportionally higher than at age 62. Waiting longer also increases the size of your cost of living increases as these will be based upon the higher starting benefit amount.

Reduce your fixed expenses

For many entering retirement their biggest fixed expense might be their mortgage. If your mortgage payment is affordable, if you have a large nest egg and perhaps will be receiving a pension then perhaps having a mortgage in retirement will not pose a financial hardship. At the very least make sure that your housing costs are affordable. If they are not, maybe this is the time to downsize.

Prior to retirement is a good time to look at your monthly expenses. Where can you cut back without reducing your quality of life? Do you still need all of those cable channels your kids used to watch when they lived at home? Can you adjust your cell phone plan? Do you need that second car? The point is that the leaner your monthly expenses are entering retirement the better able you will be able to cope with the impact of inflation or other unplanned expenses that can arise.

Plan for healthcare costs

Health-care costs have tended to increase faster than the overall rate of inflation. It is crucial that retirees factor in the cost of healthcare into their retirement budget. While Medicare will help once you turn age 65, it still does not cover everything. In their latest survey, Fidelity pegs the cost of healthcare in retirement at $300,000 for a couple both aged 65. And this figure doesn’t include the potential cost of long-term care.

It is incumbent upon pre-retirees to save enough to cover their healthcare in retirement. If your health insurance plan is a high-deductible plan with access to an HSA I urge you to take advantage of this opportunity. Salt away as much as you are allowed and if possible cover your deductibles and out-of-pocket costs from other sources while you are working. Let the HSA grow and then use these funds to cover Medicare supplement insurance and other healthcare costs in retirement.

Plan for your long-term care needs

Very much related to the cost of healthcare in retirement is the cost of long-term care if needed. Costs will vary based upon where you live, whether you are in a facility or receive care at home and a multitude of other factors. Long-term care insurance is one way to offset some or all of these potential costs. LTC insurance can be quite expensive and only gets more expensive the older you get. Insurance is often cited as most appropriate for those in the middle in terms of net worth. The poor can often rely on Medicaid and the rich can usually self-fund this expense.

The right answer will depend upon what you can afford in terms of premiums and how much of your savings you are willing to spend on this cost. The bottom line here is that you need to assume you will need long-term care at some point and have a plan to fund these costs. No surprise, these costs are increasing and will be a contributing factor to retirement inflation in the future.

Invest in tax-advantaged investment vehicles while you are working

Utilize your employer’s 401(k) plan or similar plans such as a 403(b) or 457. Contribute to an IRA. If you are self-employed, start and fund a self-employed retirement plan such as a Solo 401(k), a SEP-IRA or other plan. Since you aren’t paying income taxes on earnings throughout the years, that typically means you’ll have a larger balance at retirement than if you were paying taxes on these investment gains throughout the years. You’ll start out with a larger retirement base to help combat inflation’s effects. If some of this money is in a Roth IRA or Roth 401(k) withdrawals are tax-free to boot.

Minimize withdrawals especially during the early years of retirement

To counter inflation, you will need to withdraw larger and larger sums just to maintain the same purchasing power. To make sure you don’t run out of funds late in life, keep withdrawals during the early years to a minimum. Conventional wisdom in the financial planning world says that 3-4 percent can generally be withdrawn each year.

The reality is this is at best only a rule of thumb. The amount you spend in retirement will likely not be linear and will evolve over the course of your retirement. For example travel and other aspects of an active lifestyle might be more prevalent early in your retirement. Depending upon your health, the cost of medical care might increase during the later years of retirement. Minimizing your withdrawals from retirement accounts during the early years of retirement can help ensure that the funds you need will be there later on in retirement.

Work in retirement

For some the best way to make sure they are protected from inflation is to work a bit longer or to work at least part-time for a few years into retirement. This will add to your spendable cash flow and lower the amount you need to take from savings for a few years; both can help you combat inflation during retirement.

Be prepared for change

Things will change during the course of your retirement. You need to manage the financial aspects of your retirement. Watch your withdrawals, manage your investment allocation and monitor your spending. Be prepared for the unexpected including changes in your health.

The Bottom Line

Inflation is the worst enemy of retirees, it should be feared at least as much as any potential for investment loss. Not preparing for inflation in retirement can cause you to run out of money at a time of life when this situation is hard to rectify. The fact that many retirees are on fixed incomes either in total or in part makes them susceptible to the ravages of inflation. Managing the impact of inflation in retirement should be a top priority for all retirees.

Managing your investments and spending to minimize the impact of inflation will go a long way toward ensuring a financially successful retirement, as will saving and investing as much as you can during your working years.

Photo by Ibrahim Boran on Unsplash

Approaching retirement and want another opinion on where you stand? Need help getting on track? Do you have the right mix of investments to stay ahead of inflation? Check out my Financial Review/Second Opinion for Individuals service for detailed advice about your situation.

NEW SERVICE – Financial Coaching. Check out this new service to see if its right for you. Financial coaching focuses on providing education and mentoring in two areas: the financial transition to retirement and small business financial coaching.

FINANCIAL WRITING. Check out my freelance financial writing services including my ghostwriting services for financial advisors.

Filed Under: Retirement Tagged With: 401(k), Individual Retirement Account, Inflation, retirement, Retirement planning, SEP-IRA

My Top 10 Most Read Posts of 2018

January 1, 2019 by Roger Wohlner Leave a Comment

I hope that 2018 was a good year for you and your families and that you’ve had a wonderful holiday season. For us it was great to have our three adult children home and to be able to spend time together as a family. We all ate way too much good food.

As far as the stock market, 2018 was certainly a volatile year, we will have to wait and see what 2019 holds for investors and those looking toward retirement.

Hopefully you find many of the posts here at The Chicago Financial Planner useful and informative as you chart your financial course. Whether you do your own financial planning and investing, or you work with a financial advisor, my goal is to educate and provide some food for thought.

In the spirit of all the top 10 lists we see at this time of year, here are my top 10 most read posts during 2018:

Is a $100,000 Per Year Retirement Doable?

Year-End 401(k) Matching – A Good Thing?

401(k) Fee Disclosure and the American Funds

4 Reasons to Accept Your Company’s Buyout Offer

Life Insurance as a Retirement Savings Vehicle – A Good Idea?

4 Benefits of Portfolio Rebalancing

7 Tips to Become a 401(k) Millionaire

Should You Accept a Pension Buyout Offer?

Five Things to do During a Stock Market Correction

Small Business Retirement Plans – SEP-IRA vs. Solo 401(k)

This past year saw me expand my freelance financial writing business, while continuing to serve a number of long-time financial advisory clients. I wrote a number of pieces for various financial services firms and other financial advisors over the past year. I’m looking forward to continuing to grow my business into 2019 and beyond.

Thank you for your readership and support. Please let know what you think about any of the posts on the site (good or bad) and please let me know if there are topics that you would like to see covered in 2019. Please feel free to ask any questions you may have via the contact form.

I wish you and your families a happy, healthy and prosperous 2019.

Approaching retirement and want another opinion on where you stand? Not sure if your investments are right for your situation? Concerned about stock market volatility? Check out my Financial Review/Second Opinion for Individuals service for detailed guidance and advice about your situation.

NEW SERVICE – Financial Coaching. Check out this new service to see if it’s right for you. Financial coaching focuses on providing education and mentoring in two areas: the financial transition to retirement or small business financial coaching.

FINANCIAL WRITING. Check out my freelance financial writing services including my ghostwriting services for financial advisors.

Please contact me with any thoughts or suggestions about anything you’ve read here at The Chicago Financial Planner. Don’t miss any future posts, please subscribe via email. Check out our resources page for links to some other great sites and some outstanding products that you might find useful.

Filed Under: Uncategorized Tagged With: 401(k), Investing, retirement, Retirement planning, SEP-IRA

5 Financial Resolutions to Consider for the New Year

December 26, 2014 by Roger Wohlner 8 Comments

With the end of another year upon us ‘tis the season for New Years resolutions. Many of us might want to lose weight, change careers, eat healthier as examples. A recent study by Fidelity indicated that only 31 percent of Americans would be making financial resolutions for 2015. This is down from 43 percent at this time last year.

Do financial resolutions work? According to the Fidelity study:

“For those who say they made a financial resolution at the start of 2014, more than one-half (51%) now feel they are better off financially. In contrast, only 38% of those who did not can say the same.”

Here are 5 financial resolutions to consider for the New Year.

Take care of the basics

Just like winning football teams, financial winners do the basics well.

If you are spending too much get a budget in place and more importantly develop a means to track your spending.
If debt is an issue work out a plan to get it paid down.
Buy life insurance if you need it.
Have a will or estate planning document in place that includes naming guardians for any minor children.
Make sure that all beneficiary designations for retirement plan accounts, annuities and life insurance policies are correct and up to date.

Get a financial plan in place

This is being a “financial grownup 101” so to speak. As the saying goes “… failing to plan is planning to fail…”

If you have a financial plan resolve to review it at least once during 2015.

Seek financial advice if you need it

Is 2015 the year to find the financial advisor who is right for you? Is it the year to dump that advisor in whom you lack confidence or who fails to explain to you why you are in financial products that seem to put more money in his pocket than in yours?

Many of you reading this might be saying I can do this myself; I don’t need a financial advisor. Reality check how has that worked out for you? What did you do with your investments at the depth of the 2008-2009 market down turn? Are you really on track for retirement?

If you don’t like the answers, suck it up and get the professional help you need. At some point you get too old for financial do overs. Check out this excellent guide to finding a financial advisor. Perhaps an online financial advisor is the right choice, more and more options are available here seemingly every day.

Review your investments on a regular basis

Review and rebalance your portfolio at least annually. This is a basic tool for risk control.
Review your individual investment holdings at least semi-annually. This includes mutual funds, individual stocks, closed-end funds, ETFs and others. Ask yourself why you own each holding, how does this investment compare to its peers, if would you buy it today and is the investment still meeting your expectations.
Be sure to review your investments and your asset allocation as an overall portfolio across all accounts. This includes IRAs, 401(k)s and taxable accounts

Take charge of your retirement savings

If you are employed make sure that you are taking full advantage of your company’s 401(k) plan or similar retirement savings vehicle. Don’t ignore this you will only regret it down the road.

Make sure that you have selected the best choices from the investment menu available to you.
Contribute the maximum that you can afford via salary deferral. The 2015 maximum 401(k) deferral amounts are $18,000 for those under 50 and $24,000 for those who will be 50 or over at any point during 2015. At the very least try to contribute at least enough to earn the full company match if one is offered.
If you will be leaving your current employer make sure that you make a proactive choice as to what to do with your 401(k) balance. Leave it where it is, roll it to your new employer’s plan (if allowed and applicable) or roll it to an IRA account.

Don’t forget about an IRA contribution. Depending upon your situation you may or may not be able to contribute on a tax-deferred basis, this will depend upon your income and whether you are covered by a retirement plan at work. A Roth IRA might be an option again there are income restrictions to be aware of. A spousal IRA might also be an option for a non-working spouse under certain circumstances.

Are you self-employed? Establish and fund a retirement plan for yourself, you work too hard not to. There are a number of retirement plan options for the self-employed you can consider including a SEP-IRA and a Solo 401(k).

Especially if you are within 10-15 years of retirement make sure to get a copy of your Social Security statement and check it to ensure that you are getting credit for all earnings. Note also that there are a number of Social Security claiming strategies that you might consider to maximize your benefits.

51% of those who made financial resolutions feel better off vs. 38% of those who didn’t.

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What are your financial resolutions? No time like the present to get some in place. What are you waiting for?

Please feel free to contact me with your questions.

Check out an online service like Personal Capital to manage all of your accounts all in one place. Also check out our Resources page for more tools and services that you might find useful.

Filed Under: Financial Planning Tagged With: 401(k), Asset allocation, Financial plan, Individual Retirement Account, retirement, Retirement planning, Roth IRA, SEP-IRA, Social Security

7 Retirement Savings Tips to Help Avoid Regret

November 23, 2014 by Roger Wohlner 16 Comments

According to TIAA-CREF’s Ready to Retire Survey “…more than half of people approaching retirement (52 percent) say they wish they had started saving for the future sooner.” Some key findings from the survey include:

“Many respondents say they wish they had made smarter financial decisions earlier in their career, including saving more of their paycheck (47 percent) and investing their savings more aggressively (34 percent).
Forty-five percent of participants age 55-64 say financial readiness is the most important factor in determining when they will retire, but only 35 percent say they saved in an IRA or met with a financial advisor.
By not making the most of these options, many Americans now feel uncertain about their financial futures, with 68 percent of those approaching retirement saying they are not prepared for what’s to come
These retirement savings challenges are causing Americans to reconsider their vision of retirement. Forty-two percent of survey respondents age 55-64 say they plan on working in a part-time job, and 39 percent say they’ll be more conservative about how much they spend on entertainment and other luxuries.”

Here are 7 retirement savings tips to help you avoid regret as you approach retirement.

Start early

If you are just starting out in the workplace, enroll in your employer’s 401(k), 403(b), or whatever type of retirement plan they offer. Contribute as much as you can. If there is a match try to contribute at least enough to earn the full matching contribution from your employer, this is free money. There is no greater ally for retirement savers than time and the magic of compounding. As tough as it may be to save early in your career put away as much as you can reasonably afford as early as you can afford it.

Increase your contributions

The maximum 401(k) contribution limits for 2015 are $18,000 and $24,000 for those 50 or over at any point in the year. No matter what you are currently contributing to your plan try to increase it a bit each year. If you are currently deferring 3% of your salary bump that to 4% or even 5% next year. Increase a bit more the following year. You won’t miss the money and every bit can help fund a comfortable retirement.

Start a self-employed retirement plan

If during the course of your career you become self-employed it is still important that you save for retirement. Starting a plan such as a SEP or Solo 401(k) can be a great way for you to put away money for retirement. You work hard at your own business and you deserve a comfortable retirement.

Contribute to an IRA

Anyone can contribute to an IRA. Traditional IRAs are subject to income limits as far as the ability to make pre-tax contributions, but anyone can contribute on an after-tax basis with no income limits. All investment gains grow tax-deferred you do need to keep track of any post-tax contributions however. Roth IRAs can also be a good alternative; again there are income ceilings that can limit your ability to contribute.

Don’t ignore old retirement accounts

Today it isn’t uncommon for people to have worked for five or more employers during their career. It is important that you make an affirmative decision as to what you with your old 401(k) or other retirement account when you leave your employer. Leave it where it is, roll it to an IRA, or to your new employer’s plan (if allowed) but don’t ignore this money. Even smaller balances can add up especially if you have several such accounts scattered about.

By the same token make sure that you stay on top of any pensions that you might be eligible for from old employers. Make sure these companies can find you and be sure to carefully evaluate any pension buyout offers you might receive from old employers. These can often be a good deal for you.

Beware of toxic rollovers

Recently I have read a number of accounts about brokers and registered reps looking for employees of large organizations and convincing them to roll their retirement accounts into questionable investments with their brokerage firms. Certainly rolling your 401(k) into an IRA via a trusted financial advisor is a valid strategy but like anything else you need to vet the person suggesting the rollover and the investment strategy they are suggesting.

Avoid high cost financial products

Many financial advisors who make all or part of their income from the sale of financial products will often suggest high cost financial products to implement their financial recommendations. These might include annuities, certain mutual funds, non-traded REITs, and others. Be leery and ask about the costs and fees associated with these products. There is nothing wrong with annuities, but many of them that are pushed by registered reps carry excessive fees and have onerous surrender charges.

In the case of mutual funds, index funds are not the end all be all. But you should certainly ask the advisor why the large cap actively managed fund with an expense ratio of 1.25% or more that they are suggesting is a better idea than an index fund with an expense ratio of 0.15% or less.

52% of people approaching retirement wish they had started saving for the future sooner.

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At the end of the day starting early, investing wisely and consistently, and being careful with your retirement savings are excellent ways to avoid the regrets expressed by many of those surveyed by TIAA-CREF.

NEW SERVICE – Do you have questions about retirement planning and making the financial transition to retirement? Schedule a coaching call with me to get answers to your questions.

Approaching retirement and want another opinion on where you stand? Need help getting on track? Check out my Financial Review/Second Opinion for Individuals service for more detailed advice about your situation.

Please contact me with any thoughts or suggestions about anything you’ve read here at The Chicago Financial Planner. Don’t miss any future posts, please subscribe via email. Please check out the Hire Me tab to learn more about my freelance financial writing and financial consulting services. Check out our resources page for links to some other great sites and some outstanding products that you might find useful.

Filed Under: Retirement Tagged With: 401(k), Annuity, Index fund, Mutual fund, retirement, Retirement planning, SEP-IRA, TIAA-CREF

Eight Financial To Do Items for the Rest of 2014

August 27, 2014 by Roger Wohlner 5 Comments

We are nearing the final third of 2014. Labor Day is upon as is the start of the 2014 football season. College football starts this weekend. Next week my beloved Packers start their quest for the Super Bowl against the Seahawks. Kudos to the Little Leaguers from Jackie Robinson West, Chicago’s best baseball team by far.

Though most of 2014 is behind us there are still plenty of things left to do financially in 2014. Here are eight financial to do items for your list.

Review your 401(k)

With the S&P 500 and other market indexes at or near all-time highs this is a good time to revisit your 401(k) asset allocation and to rebalance if needed. Better still why not take this time to active the auto-rebalance feature if your plan offers this feature?

Are you on-track to contribute the maximum to your 401(k) this year? If you are not there is still time to increase your salary deferral if you can afford it. The maximum contributions are $17,500 and $23,000 if you will be 50 or over at any point during 2014. Even if you can’t contribute the maximum amount this is still a good time to bump your deferral if you can.

Prepare for employee benefits open enrollment

Open enrollment has always been important. But with the advent of Obama Care and the efforts of many employers to rein in health insurance and all benefits costs, it is more important than ever to manager your employee benefits as an important part of your overall compensation.

I suggest reviewing your usage year to date. Once the materials are issued for your employer’s open enrollment be sure to review them carefully with an eye towards any changes in various benefits. You can then look at your current usage and anticipated changes in your personal circumstances in combination with the new benefits menu to make the best choices for you and your family.

Also note that many organizations use this time frame to roll out any changes in the 401(k) menu or other changes in the plan so keep an eye out for that as well.

Update your estate planning documents

The recent deaths of celebrities such as Robin Williams and Lauren Bacall remind us of our own mortality. If you don’t have a will, a named guardian for your minor children, or other estate planning documents as appropriate for your situation it is time to get moving and get this done. The cost of being unprepared can be devastating to your family and loved ones and can frankly distort their memories of your life.

Along these lines also double check your beneficiary designations on retirement accounts, life insurance policies, annuities and other assets that pass via beneficiary designation to ensure that they are consistent with your intentions.

Get a retirement plan in place if you are self-employed

I’ve mentioned this here on the blog on several occasions, but it’s worth repeating. If you are self-employed you need to have a retirement plan in place for yourself. You work too hard not to do this.

Options to consider include a SEP-IRA, a Solo 401(k), a SIMPLE, or even a pension plan. If you do not have anything in place some plans such as the Solo 401(k) must be established by the end of the calendar year though you can fund them up to the time you file your tax return. Check the rules for any plan you are considering.

Don’t forget an IRA as well. If your ability to contribute is limited this can be a great way to start.

Check your Social Security statement

The Social Security Administration has indicated that if will begin mailing out statements again after halting this practice several years ago. Make sure to review your statement to be sure that you have received credit for all years worked and that you understand all of the benefits shown on your statement. You can also go their site to check your benefits as well.

Track down old pension and retirement accounts

As we move through our careers many of us will switch jobs a number of times. It is quite common to leave a number of retirement accounts, both 401(k)s and pensions in our wake. It is a good idea to take some time to make sure we are aware of all of these old accounts.

In the case of an old 401(k) or similar defined contribution account make a decision as to what to do with the account balance. You can typically leave it where it is, roll it to a new employer’s plan if allowed, or roll it over to an IRA. If it is a relatively small amount in relation to your other retirement and investment accounts it might make sense to consolidate with other money so you have one less account to keep track of.

In the case of a pension you may have a few options. At the very least you will want to ensure that your old employer has your current contact information and you will want to apprise them of any changes in the future. You may have an option to take the benefit as a lump-sum and roll it into an IRA or to receive a monthly benefit at some point in the future.

While old retirement accounts might seem small and insignificant, I’ve seen more than a few folks with several of them floating around. At some point this can become real money if you add it all up.

Review your investments and your strategy

With the markets at or near record highs this is a good time to review your investment holdings, your overall asset allocation, and your strategy going forward.

If you hold stocks how have they done? Are any of them at or near your selling price target (you have one right)? Is your allocation to stocks higher than your target? Are you now taking more risk than you desire? Have portfolio gains pushed you closer to your financial goals and is it time to take less risk?

Get a financial plan in place or update your current one

Have you done any financial planning? If not, no better time than the present. Whether you are early or mid-career or in the home stretch toward retirement a financial plan prepared by a competent, fee-only financial advisor can help you focus in on your goals and on strategies to achieve those goals. If you have a plan in place this is a good time to review and if needed update your plan. NAPFA has published this excellent guide to choosing a financial advisor.

With summer soon behind us and the end of the year approaching this is a great time to get your financial house in order. What are you waiting for?

Check out the 2015 version of this post Financial Planning Steps for the rest of 2015.

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Filed Under: Financial Planning Tagged With: 401(k), Financial plan, Individual Retirement Account, Investing, Lauren Bacall, NAPFA, retirement, SEP-IRA, Social Security

7 Retirement Investing Tips

February 26, 2014 by Roger Wohlner 4 Comments

Retirement is a hot topic these days as it should be. There have been many studies and reports in the media about the sorry state of retirement readiness here in the U.S. With thousands of us Baby Boomers turning 65 every day this issue will certainly not be going away any time soon. One of the key factors in achieving your retirement goals is the amount saved and invested for retirement. Here are 7 retirement investing tips.

Get started

Whether you are 25 or 45 or even older get started if you haven’t already. Whether in your employer’s 401(k) or similar retirement plan, an IRA, a taxable account, or other method the best time to start is today.

Do a financial plan

If you are in your 30s or 40s or certainly if you are older this is a great time to get a financial plan in place. A comprehensive financial plan is like an investment and retirement game plan. The plan should tell you where you are in terms of your retirement goals, how much you need to save to get there, and how to allocate your investment dollars in terms of the returns needed and the level of risk you are comfortable assuming.

Utilize your 401(k) plan

Whether your company’s 401(k) plan is lousy or great it generally makes sense to utilize it as part of your retirement investing strategy. For example if your company offers a match you will want to contribute enough to earn the full match, this is free money. This is also true for similar plans such as a 403(b) or other defined contribution plans. The automatic salary deferral feature of these plans makes investing easy and painless.

401(k) plans generally offer a menu of investment choices that include both individual mutual funds (or similar investments) and asset allocation funds such as Target Date Funds. I’m not a big fan of Target Date Funds for those in their mid 40s or older but they can be a solid choice for younger retirement investors and anyone who is not comfortable allocating their own account.

Utilize IRAs

IRAs can be used in a number of ways. Anyone can contribute to an IRA. The contribution limits for 2013 and 2014 are $5,500 for those under 50 and an extra $1,000 for those 50 and older. Traditional IRA contributions may or may not be tax-deductible depending upon your income level and whether or not you are covered by a workplace retirement plan. You may also be able to contribute to a Roth IRA, again there are income limitations. If you are a non-working spouse you can contribute to an IRA as long as you’re working spouse earns enough to fund the IRA.

It is likely that you will switch employers a number of times over the course of your career. An option for an old 401(k) account is to roll it over to an IRA. This option can allow you to combine several old 401(k) plans and often allows greater investment flexibility than leaving the money with your old employer or rolling the old balance to a new employer’s plan.

Use self-employed retirement plans

If you are self-employed you need to provide your own retirement plan. Two great options are the SEP-IRA and the Solo 401(k). Whether these or other options don’t pass up this opportunity to save and invest for your retirement.

Tread carefully with annuities

Annuities can be a viable investment vehicle for retirement. However you need to tread carefully here. Whether a variable annuity, fixed annuity, equity index annuity, or some other form of this product you need to understand all fees, expenses, and restrictions. There is nothing wrong with annuities but there is plenty wrong with many of the annuities sold and the methods used to sell them.

Make sure you pull it all together

Regardless of the type of account you use or the types of investment vehicles chosen it is vital to view your retirement investments in the context of an overall portfolio. IRAs, 401(k)s, taxable accounts, mutual funds, ETFs, individual stocks, and other investment vehicles must be viewed in terms of their role in your overall retirement investment strategy.

Not doing this can lead to overlapping holdings and taking too much or too little risk. And remember investing for retirement includes not only investing to retirement but also investing in an appropriate fashion once you actually do retire.

Please contact me at 847-506-9827 for a complimentary 30-minute consultation to discuss all of your investing and financial planning questions. Check out our Financial Planning and Investment Advice for Individuals page to learn more about our services.

The Chicago Financial Planner is a participant in the Amazon Services LLC Associates Program, an affiliate advertising program designed to provide a means for sites to earn advertising fees by advertising and linking to Amazon.com. If you click on my Amazon.com links and buy anything, even something other than the product advertised, I earn a small fee, yet you don’t pay any extra. Click on the Amazon banner below to go directly to the main site or check out the selections in our Book Store.

Photo credit: Flickr

Filed Under: Retirement Tagged With: 401(k), Individual Retirement Account, retirement, SEP-IRA

The IRA – An Overlooked Retirement Savings Tool

March 27, 2013 by Roger Wohlner 2 Comments

An updated version of the infographic for 2014 appears here.

According to a new survey by TIAA-CREF; “Eighty percent of those surveyed said they are not contributing to an IRA, up 4 percent from last year. Close to half also lack basic understanding of what IRAs are and how they are used.” To the extent that these respondents represent the investing public, many people are overlooking the IRA as a retirement savings tool.

“Many individuals are still missing out on the long-term savings benefits of IRAs, simply because they don’t understand what they are and how they work,” says Dan Keady, CFP® and director of financial planning for TIAA-CREF. “By allowing savings to grow on a tax-deferred basis, an IRA can help give your current retirement savings a boost no matter what stage of life you’re in. Even if you’re on a tight budget or just starting to save, if you start small and invest wisely, that amount should grow over time.”

IRA contribution details

In the interest of providing you the reader some information about the contribution limits for IRAs here is a great chart showing the rules for IRAs for the 2013 tax year (a chart for 2012 follows).

Created by 2013 Tax Rules

Many of you might still be in a position to make a 2012 contribution. Here is the same chart for the 2012 tax year. For those of you who are self-employed note that you can still start a SEP-IRA for 2012 and you have until the date that you file your return, including extensions, to fund it. Check with your financial or tax advisor to determine if you can still contribute to an IRA for 2012.

I would encourage you to take a look at your situation to see if an IRA contribution (in any of it’s variations) makes sense for you as a retirement savings tool. As always I encourage you to discuss this with your tax or financial advisor if you use one.

Please feel free to contact me with questions about IRAs or about your overall financial and retirement planning needs. Check out our Financial Planning and Investment Advice for Individuals page for more information about our services.

Check out our Resources page for links to a variety of tools and services that might be beneficial to you.

My thanks to the folks at Greene IRA Success for their permission to use these great charts

Filed Under: IRAs Tagged With: Individual Retirement Account, retirement, Roth IRA, SEP-IRA

4 Retirement Savings Steps to Take Now

November 28, 2012 by Roger Wohlner 2 Comments

Updated to include 2015 retirement plan contribution limits.

As we approach the end of the year, there are any number of things to occupy our thoughts. Holiday shopping and celebrations are at the top of many lists. Fears of the impending Fiscal Cliff may or may not grip your thoughts financially (CNBC thinks that this is so critical that they have taken to posting a Fiscal Cliff countdown clock, journalism or entertainment?).

For those of you saving for retirement here are four retirement savings steps to take now.

Increase your 401(k) contribution level.

Is it your intention to max out your 401(k) for the year (current limits are $18,000 if you are under 50 and $24,000 if you are 50 or over at any time in 2012; these limits will remain the same in 2016)? Check your latest pay stub to see of you are on track, and adjust your withholding if you are running behind. While there is not much time left in 2015, you might be able to have additional amounts withheld from your last couple of 2015 paychecks. Even if your contributions are more modest this is a good time to take stock and see if you might be able to up your salary deferral percentage a bit. Over time even small increases in the amount saved can make a big difference in your ultimate retirement nest egg. I urge you to take a look at your situation heading into 2016 and to consider increasing your deferrals to the extent that you can.

Start or fund a retirement plan if you are self-employed.

If you don’t have a retirement plan in place for yourself, make 2015 the year to start. Plans to consider are the SEP-IRA, the Solo 401(k), the SIMPLE, or if your business cash flow permits a Cash Balance Pension Plan. Whatever your situation, start a retirement plan for yourself. You work too hard not to reap the benefits. If you have a plan in place, make sure you fund it to the maximum amount possible.

Review your retirement plan allocation and your investment choices.

Is your 401(k), 403(b), TSP, or similar retirement plan account allocated in a fashion that is consistent with your retirement goals, your timeframe, and your risk tolerance? Does your allocation fit with your overall financial plan and with outside investments (IRA, spouse’s retirement plan, taxable investments, etc.)? This time of year is open enrollment season for the employee benefit plans of many companies. Some companies also use this time to roll out new investment choices for their retirement plans. While you are focused on your benefits, take the time to review your 401(k) and make adjustments.

Get a financial plan in place.

Planning for retirement is like any journey. If you don’t know where you are headed you likely won’t know when you’ve arrived? How much should you be saving? How should your money be invested? These are among the questions that a financial plan will address. Have you been putting off hiring a financial planner to review your situation? Have you been meaning to do this yourself but haven’t found the time? My suggestion, lose the excuses and get this done. Further if you do hire a professional make sure that this person is a fee-only (not fee-based) advisor who does not have the inherent conflicts that come with need to sell you financial products.

Please feel free to contact me with your financial planning and retirement questions.

Photo credit: Wikipedia

Filed Under: Retirement Tagged With: 401(k), fee-only, Financial plan, Investment, retirement, SEP-IRA

SEP-IRA vs. Solo 401(k)

High maximum contributions

Investment flexibility

Contribution flexibility

Easy to open and maintain

Roth options are available

Manage all of your retirement resources

Use a conservative inflation rate for planning purposes

Invest to stay ahead of inflation

Make good pension decisions

Make sound Social Security decisions

Reduce your fixed expenses

Plan for healthcare costs

Plan for your long-term care needs

Invest in tax-advantaged investment vehicles while you are working

Minimize withdrawals especially during the early years of retirement

Work in retirement

Be prepared for change

The Bottom Line

Take care of the basics

Get a financial plan in place

Seek financial advice if you need it

Review your investments on a regular basis

Take charge of your retirement savings

Start early

Increase your contributions

Start a self-employed retirement plan

Contribute to an IRA

Don’t ignore old retirement accounts

Beware of toxic rollovers

Avoid high cost financial products

Review your 401(k)

Prepare for employee benefits open enrollment

Update your estate planning documents

Get a retirement plan in place if you are self-employed

Check your Social Security statement

Track down old pension and retirement accounts

Review your investments and your strategy

Get a financial plan in place or update your current one

Get started

Do a financial plan

Utilize your 401(k) plan

Utilize IRAs

Use self-employed retirement plans

Tread carefully with annuities

Make sure you pull it all together

IRA contribution details

Increase your 401(k) contribution level.

Start or fund a retirement plan if you are self-employed.

Review your retirement plan allocation and your investment choices.

Get a financial plan in place.

Financial Review/Second Opinion for Individuals

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