Retirement planning isn’t easy these days, especially if you’re getting started late in the game. The amount of money you need to retire depends on many things including but not limited to the quality of life you desire in your golden years, whether or not you want to leave an inheritance to your children, considerations of your anticipated health costs as you grow older, inflation, tax rates, the state of the economy, and perhaps most importantly—the amount of money you are able to contribute to a retirement plan.
For some, simply thinking about saving for retirement creates anxiety because at this point, your income may not allow for an extra dime to be contributed to a savings plan. Because of this, you may not have fully investigated the many different types of plans available. You may be unaware of certain plans that, depending on your situation, may offer more flexibility in saving that might make it possible for you to reach your retirement goals. If you fit into this category—well, this article is just for you.
Define Your Retirement Goals
Before you can even begin to determine what plan best fits your needs, you must first do a bit of soul searching to define your goals. Do you plan to downsize, maybe live in the tiny homes that are becoming so popular? Or do you wish to accrue enough capital to travel the world in style? Do you want to leave a legacy for your children? Maybe you want to build the extravagant home of your dreams. Perhaps some of these are lofty goals and you simply want to save enough to comfortably live on without having to work past the age of 65.
Once you define your realistic goals, consult with a financial planner or other professional who can examine your situation and help you decide how much you can and need to save achieve success. You may find that if you cut a few corners in your current lifestyle, you have more money than you thought that can be contributed to a retirement account. You may decide to take on a part-time job for a bit of extra cash for this purpose. Regardless—once you have a clear plan and the motivation to take the steps necessary to accomplish accruing savings, the next step is to choose a retirement plan that’s best for you.
While you can certainly (and absolutely should) take advantage of any employer sponsored plan you are eligible for, there are several other options you can utilize to potentially secure the retirement funds of your dreams.
Self-Direct Your Retirement Plan
One investing strategy that is growing in popularity among retirement planners are self-directed plans. Self-directed plans are no different than typical retirement accounts—with one critical exception: account owners have complete control over their retirement funds and are able to make their own investing decisions. The main attraction of these accounts is the availability of a large pool of alternative assets permissible in these plans.
Alternative investments include things like real estate, private lending options, precious metals, timberland, oil and gas options—and much, much more. Individuals have the freedom to invest in what they know best to potentially build retirement funds at a faster pace than traditional stocks, bonds, and mutual funds offer.
So, if you want more control over your retirement plan and would like the ability to use different assets to diversify your portfolio and potentially improve your chances of building a healthy income for your future, self-directing any of the below plans may be the right choice for you.
Choose a Plan
These are the most common retirement plans, which allow for pre-tax savings. You are allowed to make up to $5,500 a year in contributions, with an additional $1,000 catch-up contribution if you’re 50 or over. You pay tax when you begin taking distributions. Distributions may not be taken until you reach the age of 59 1/2 or you’ll be responsible for early withdrawal penalties along with tax due at that time. However, you are not required to take distributions until you reach the age of 70 1/2.
The benefits of a traditional IRA:
- You are eligible to deduct your contribution now and you anticipate your tax rate at retirement to be lower than your current tax rate.
- You need a tax deduction to lower your current tax bill. (Some investors still contribute to an IRA account even without the tax deduction.)
Roth IRAs are the favored account by many a retirement planner. Contribution limits are the same as a traditional IRA. But, here, contributions are made after tax, and earnings grow tax-free provided certain requirements are met. Individuals of all ages who have earned income are eligible for these plans as long as their income falls within the required limits for these accounts. Check with your CPA to determine if you are eligible before opening a Roth account.
The benefits of a Roth IRA:
- Contributions may be made after you reach the age of 70 1/2.
- There are no required minimum distributions at 70 1/2.
- In most instances, contributions may be withdrawn at any age with no tax liability.
- When you reach the age of 59 1/2 and if the account has been funded for at least five years, you can take tax-free withdrawals of both contributions and earnings.
Simplified Employee Pension Plans (SEP IRAs)
SEP IRAs designed for the self-employed, partners, and owners of corporations. Regarding this plan, a self-employed person is considered an employee as well as an employer and contributions limits are somewhat complicated. We strongly advise you seek appropriate counsel when determining contributions if you are self-employed.
SEP IRAs are simple and cost effective plans that allow employers and employees, if any, to make contributions to individual, traditional IRAs owned by the employees, at institutions of their choice. Employers may contribute up to 25 percent (up to $53,000) of each employee’s pay, which is tax-deductible—and all employees must receive the same benefits. Distributions can be taken after the plan owner reaches the age of 59 ? and axes are assigned at ordinary income tax rates at that time.
Consider a self-directed SEP IRA if:
- You are a sole proprietor, independent contractor, self-employed, partner, corporation, or S corporation.
- You do not want to be required to make contributions every year.
- You desire a plan with low administrative costs.
Savings Incentive Match Plans for Employees (SIMPLE IRAs)
This retirement plan is designed for small employers to offer their employees. Here, an employee includes a self-employed individual who receives earned income.
SIMPLE IRAs are salary reduction transactions and employees choose to defer a pretax percentage of compensation each pay period into this plan. Employers contribute the salary deferral, along with a matching amount, on behalf of the employee into the account. Contributions and earnings in these plans are not taxed until the time of distribution. Yearly contributions can be made in amounts of up to $12,500 (+ $3,000 if 50 and over) with up to 3 percent of an employer’s match.
Consider a self-directed SIMPLE IRA if:
- You have a company with less than 100 employees.
- You want plan with low start-up and administrative costs.
- You want you and your employees to have an easy way to contribute toward retirement using convenient payroll deductions.
- You need to reduce business taxes.
- You would like flexibility in how much to contribute to the employees’ plans.
Individual 401(k) Plans
This is a profit-sharing plan with a 401(k) option, but is less complicated and not as costly as a traditional 401(k). The biggest potential benefits are gained by one-person businesses earning between $51,000 and $165,000 per year.
Businesses that can establish these retirement plans include corporations, partnerships, and sole proprietorships. If you have no employees or if you are a business where you and your spouse are the only employees with compensation in excess of $100,000—this may be just the plan for you. However, note that these plans do not have provisions for common-law spouses.
Consider an individual(k) retirement account if:
- You are a sole proprietor with no employees other than your spouse or partner(s).
- The plan trustee and administrator of the plan is simply the business owner, their spouse or a partner. A third-party administrator is acceptable if desired.
- You desire the largest potential contribution for a business without employees.
- You want the ability to borrow from your plan.
Hopefully, after learning the different plans available, you are more equipped to begin forming a plan on how you can save for retirement. We cannot impress how critical doing so is—and every dime you are able to save helps.
As a self-directed plan administrator serving clients across the nation, Advanta IRA is committed to educating individuals on how self-direction works, and the investing opportunities that alternative assets present. We often hold free webinars and seminars for this purpose. Please visit our event calendar for dates, times, and subjects that interest you.
If you have questions about this article or would like to learn more about self-directed retirement plans, please contact us.