Investment Advisor and Fiduciary
  • About Jason
  • Work with Jason
  • RGA Investment Advisors LLC
    • Investment Strategy
    • Comprehensive Financial Planning
    • GIPS Verified Performance
    • Portfolio Construction
    • Our Story
    • Team
  • Writing
    • Investment Commentary
    • Valuewalk link
  • Contact Jason

Retirement planning vehicles for the self-employed

10/18/2013

0 Comments

 
As we approach year-end, we should take a moment to consider retirement planning.  I urge my self-employed readers to start a retirement plan if one is not already in place.  Depending on your current circumstance, a cash balance pension plan (type of defined benefit plan) or a SIMPLE IRA (type of tax deferred employer-provided plan) might be suitable for you.  I will discuss both of these (and other retirement vehicles) in future posts.  For this entry, however, I'd like to focus on two popular and available options for the self-employed; the SEP IRA and the solo 401(k).

The SEP IRA
A Simplified Employee Pension Individual Retirement Arrangement (otherwise known as the SEP IRA), is typically adopted by business owners who seek to provide retirement benefits for the business owners and their employees.  
  • There are no significant administrative costs for a self-employed person with no employees.
  • All employees must receive the same benefits under the SEP plan (assuming the business has employees)
  • The account can be opened at most major custodians and it offers the same investment flexibility as a typical IRA
  • You can contribute up until your tax filing date (this includes the extension filing deadline of 10/15)
  • Your contributions is limited (for 2013) to 25% of your compensation, or $51,000
  • All contributions are made from the business.

The Solo 401(k)
A Solo 401(k), which is also known as a Self Employed or Individual 401(k), is a retirement savings vehicle designed specifically for employers with no full-time employees other than the business owners and their respective spouses.  A key element of this particular type of plan is that it covers only the business owners and their spouses, thus not subjecting the 401(k) plan to complex ERISA (The Employee Retirement Income Security Act of 1974) rules.
  • Contributions include both employee and employer deferral components
  • Contribution limits (for 2013) are $51,000, or $56,500 to "catch-up" if you are 50 years of age (or older) at any point during 2013
  • These retirement vehicles can be opened at most any major custodian
  • These retirement vehicles limit participation to sole owners, business partners and their spouses

So how do you choose between the two options?

Consider cash flow
  • When you use a SEP-IRA with your employees, you will need to contribute the same percentages for your employees as you defer for yourself. This becomes an expensive proposition.  I generally recommend this plan for the self-employed with no employees.
  • SEP-IRA contributions are calculated as a percentage of compensation, so if this amount varies significantly year to year, so will your allowable contribution.  A Solo 401(k), by contrast, allows you to defer the lesser of $17,500 ($23,000 if you're 50 or over) or 100 percent of your 2013 income plus the profit sharing contribution.  This flexibility may provide a better option for those with variable income and cash surplus.

Consider timing
  • Both plans allow for contributions up to the tax filing deadline (including extension deadlines if you have extended your tax return).  The Solo 401(k), however, must have been established during the calendar year in which you would like to participate.

Consider features
  • Loans are available from Solo 401(k)s but not from SEP-IRAs
  • You may be able to enable a Roth feature on a Solo 401(k) if you plan documentation allows for it.  This is not currently possible with a SEP-IRA
  • Both plans can be established at most custodians, and most custodians have a prototype plan document that can be used if you do not have your own.

Best regards,

Jason M. Gilbert, CPA/PFS, CFF
T: 516-665-1940
E: jason@rgaia.com

0 Comments

Your comment will be posted after it is approved.


Leave a Reply.

    Picture

    About Jason

    Jason Gilbert is Managing Director of RGA Investment Advisors LLC.  He has over 10 years of experience in investment advisory, including portfolio construction, financial strategy, and advanced planning for high-net worth and institutional clients.  He maintains an extensive background in both forensic accounting and personal finance, and serves as a fiduciary and trusted partner to his long-standing clients.

    View my profile on LinkedIn
    Tweets by @jasonmgilbert

    RSS Feed

    Categories

    All
    Asset Allocation
    College Saving
    Commentary
    Cord Blood
    Estate Planning
    Fee Only
    Fee-only
    Investing
    Millenial
    Open Letter
    Personal Finance
    Real Estate
    Retirement Planning

    Archives

    December 2014
    November 2014
    October 2014
    July 2014
    June 2014
    May 2014
    April 2014
    March 2014
    February 2014
    January 2014
    December 2013
    November 2013
    October 2013
    September 2013
    August 2013

    Disclaimer
    The opinions expressed on this site are those solely of Jason Gilbert and do not necessarily represent those of RGA Investment Advisors LLC (“RGA”).  This website is for informational purposes only and does not constitute a complete description of the investment services or performance of RGA. Nothing on this website should be interpreted to state or imply that past results are an indication of future performance. A copy of RGAs ADV Part II and privacy policy is available upon request. This website is in no way a solicitation or an offer to sell securities or investment advisory services. 

    BrightScope Advisor Page Profile

Copyright 2023 Jason M. Gilbert, CPA/PFS, CFF, CGMA

  • About Jason
  • Work with Jason
  • RGA Investment Advisors LLC
    • Investment Strategy
    • Comprehensive Financial Planning
    • GIPS Verified Performance
    • Portfolio Construction
    • Our Story
    • Team
  • Writing
    • Investment Commentary
    • Valuewalk link
  • Contact Jason