Aging gracefully is a nearly universal goal. Continuing to enjoy life, having a low risk of disease or disability, and maintaining a high level of physical activity and mental acuity are the hallmarks of successful aging. The process of aging, however, impacts people differently, and leaves a significant portion of older adults vulnerable to deteriorating physical or mental health, rendering some unable to continue to manage their personal and financial affairs. In some unfortunate cases, this can lead to elder abuse. While unpleasant to contemplate, one-third of those age sixty five or older suffer some degree of frailty and these risks increase with age. The good news is that many of the risks associated with aging can be addressed with good planning.
Anyone that has run a marathon knows that it can be a long and punishing journey to the finish line, filled with a slew of physical and mental obstacles along the way. Yet, despite the challenges, or for many of us because of them, participants line up year after year to collect another finisher’s medal.
Sound a little like working as a tax accountant during tax season, or, for that matter, planning for retirement? Well, aside from the finisher’s medal, blood blisters and aching quadriceps. To be successful, all three require endurance, a little luck and the execution of a thoughtful strategy.
With Tax Day in 2 weeks, you might be wondering whether there are any last minute things you can do to save on taxes from last year’s income. Good news: if you’re an entrepreneur, there is!
Did you know that if you’re self-employed or a small business owner there is a special type of pension plan available for you (and your employees)? Available for businesses of any size, a simplified employee pension plan (SEP-IRA)is a written arrangement that allows a self-employed individual or a business owner to contribute to a pension plan with significantly higher limits than a traditional IRA.
A self-employed individual can contribute (pre-tax!) between 0-25% of their compensation (maximum contributions up to $51,000 for 2013, $52,000 for 2014); here’s the small catch: each eligible employee has to get the same percentage.
There are distinct advantages to setting up a plan like this:
- You can contribute more (up to $51,000) to a plan like this than the traditional IRA maximum annual contribution of $5,500
- The contribution is tax deductible
- The account grows tax deferred until you withdraw the money
- There are no annual reporting requirements for SEPs as long as each participant or individual who is in the plan receives a copy of the plan agreement and disclosure form (this is unlike a traditional 401K, defined contribution plan, or defined benefit plan, which have an annual 5500 form filing requirement)
In order to deduct the contribution, you must establish the plan by April 15th and contribute to the plan by April 15th (or the due date of your return including extensions – check with your accountant).
There are very few drawbacks to setting one of these plans up.
How to set up a SEP-IRA:
SEP-IRAss can be set up through a financial advisor, through a brokerage house, or through a bank.
Participants are eligible to sign up for a wide variety of investment opportunities including mutual funds, stocks, bonds, ETFs, and many more.
There should be no establishment fees to launch the plan and annual fees are minimal.
If you’re closer to retirement, there are certain decisions that will be required for you to make as it relates to your employer sponsored retirement plan such as a 401K or 403 B plan. For the most part, these monies have accumulated as tax-deferred in these types of accounts. Tax-deferred accumulation means that when you withdraw the money in retirement:
1. The withdrawn money will count as income
2. The withdrawn money will be subjected to income tax (federal and state)
In order to avoid paying income taxes, you generally have two options:
1. Leave the money in the plan
2. Roll the money over into an individual retirement account (IRA)
In order to determine which option makes the most sense for you, you will need to explore the pros and the cons that accompany each of these choices.
Option 1: Leave your money in a 401K or 403B account
Pros & Cons:
The benefit of leaving the money in the 401k or 403b account is that you aren’t required to do anything until you need to withdraw the funds from the accounts. However, you also will not be able to add any money or deposit additional funds into the accounts once you have retired/are no longer working.
Even if you are retired, a benefit of leaving your money in your employer’s plan is that you can continue to manage your money by the plan administrator just as you did when you were an employee.
In order to determine whether or not to leave your money in the account, you will need to check your options as it relates to your withdrawal options. Some companies will limit both the minimum amount you can withdraw at any given time as well as how frequently you can make withdrawals. It is important to make sure that the regulations around frequency of withdrawals and withdrawal amounts matches your future needs. In other words: you need to read the fine print.
It is also important to ensure that you know when you are required to begin taking distributions from your employer-sponsored retirement plans.
Another important factor to consider is, in the event of death, what plan distribution options are available to your beneficiaries.
Lastly, consider the investment options for your employer-sponsored plan. Typical 401ks and 403b plans have a limited number of investment options to the employee.
Option 2: Rollover your money to an IRA
Pros & Cons:
Typically, rolling over employer-sponsored retirement accounts to an individual retirement account will provide you with the greatest amount of control and flexibility. It will enable you to access your money at any point, as frequently as you wish.
Most financial institutions will provide a plethora of options from which IRA holders may choose. In contrast to an employer-sponsored plan, you won’t be limited to a small number of investment options.
You will want to analyze or examine the costs and fees associated with an IRA such as mutual fund internal expense ratios, money management fees, fees for maintaining an IRA and any fees incurred for rolling your money over.
However, remember that once you reach age 70.5 you must begin withdrawing funds in accordance with the IRS tables and can no longer defer taking contributions.
Lastly, be sure to check your state statutes to understand whether your money will be protected from creditors.
To rollover or not rollover? It all comes down to determining your goals and objectives.