How To Set Up A Retirement Plan For Myself

Understanding Your Investment Account Options

Now that youve made the right choice in deciding to save for retirement, make sure you are investing that money wisely.

The lineup of retirement accounts is a giant bowl of alphabet soup: 401s, 403s, 457s, I.R.A.s, Roth I.R.A.s, Solo 401s and all the rest. They came into existence over the decades for specific reasons, designed to help people who couldnt get all the benefits of the other accounts. But the result is a system that leaves many confused.

The first thing you need to know is that your account options will depend in large part on where and how you work.

Solo And 401 Rules When You Have Employees And Multiple Businesses

A 401 is a great benefit normally associated with large companies where the employee makes contributions and the employer offers a match. The contribution limits are high and can allow for significant tax deferral on the income you earn each year. What a lot of people may not know is that you dont have to be a large company to have a 401 plan. In fact, you can be the only employee in your own business and have a retirement plan.

If it is just you in your business, your company can start a retirement plan known as a solo 401. The solo 401 allows you to adopt a retirement plan and make personal as well as company contributions to the plan for yourself and any of the owners of the company.

• You must have a business generating ordinary income to make to have a 401 plan.
• You can personally contribute up to $19,000 to the plan.
• Your company can contribute up to 25% of the income it pays you.
• For 2019 the total max 401 contribution is $56,000.

The 401 plan can be self-directed, which means you can invest the funds in almost any opportunity you find . The 401 also has a loan provision allowing you to borrow funds from the plan and use them for anything you want.

What If I have Multiple Businesses With Only Employees in Some?

Controlled Group Rules

What Does A 401k Do

A 401k allows employees of companies in the United States to save money in a defined contribution retirement account that is tax deferred. This deferral is an incentive for people to save so they will have an income stream upon retirement. Typically, any income contributed to a 401k in a given year will not be subjected to tax in that same year .

The IRS places limits on individual contributions every year, although the United States government allows for top ups in certain situations if you are over the age of 50.

The money will only be taxable when it is removed from the account.

The 401K was introduced in 1978 and the name refers to the section of code assigned to it Section 401. Plans similar to that of a 401k exist in other countries. In Australia, the program is called Superannuation, in Canada it is referred to as an RRSP and in Japan it is called iDeCo.

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How To Build Your Net Worth

While your investment portfolio is a big part of the net worth equation which you can calculate by adding up the value of your assets and subtracting your debt it’s not the only thing that can potentially contribute to your financial well-being in retirement. Here are five ways to increase your net worth.

Depending on where you live and when you purchased your abode, a house can end up being your most valuable asset and a lot of people do sell their home later in life and then use that money to help fund their retirement goals. Real estate can be a great asset because it tends to rise in value over time though as we saw during the Great Recession, that’s not a guarantee by any means. While renting can be cheaper, and you can then invest the difference and potentially earn more over time than you would on a house, real estate essentially forces you to save. As you pay down your mortgage, and as the value of your property rises, your net will increase.

A business can add a lot of value to someone’s net worth or not. While many businesses do provide a decent living for their owner, they’re an illiquid asset, often hard to value that takes time to sell. Putting a price on a business is a lot harder than coming up with a sale price for a home, though, so talk to an expert who can help you set a valuation and determine how much your operation may net.

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How To Invest When Youre Approaching Retirement

As you might have discovered upon ever mistaking your partners jeans for your own, everyone is different. If youre among the vast majority of people who will be spending your life savings during retirement, youll want to make sure that your moneys actually available when you need to access it.

The general rule is that as you start approaching retirement, youll want start bringing down the level of risk in your portfolio. You don’t want your accounts fluctuating significantly in value as you’re drawing down some of the capital from your portfolio. – Mike Allen, Portfolio Manager, Wealthsimple

So, about ten years out, youd likely want to consider how to switch out some equity investments for something less volatile, like bonds.

But its worth considering three popular approaches to asset allocation, the flight path model, the age-in-bonds model, and the aggressive model, all three of which are compared here.

Not all investors will want to take their foot off the gas of equity growth in favor of more secure alternatives. We see many clients that are retired that have more than enough money to live off for the rest of their life, Allen says. They often want more of a growth focused portfolio to continue allowing their estate to grow throughout their decades of retirement.

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Build Your Home Equity

Your home is a potential source income as well. Some people may find the option of a reverse mortgage beneficial to them. If you dont intend to use a reverse mortgage, your home can still provide you with some profit in the event that you choose to downsize and sell the home. Either way, building your homes equity will put you in the best position to make use of it. There are a variety of things you can do to build your equity. Home improvement projects can add value to the home. Many deck features in particular are sure to attract buyers. Kitchen and bathroom upgrades also tend to add value to homes. These projects can easily go beyond the budget though, so its important to carefully manage costs when using projects to build equity.

Why Saving Is Hard For The Self

The reasons for not saving toward retirement wont be a surprise to any self-employed person. The most common include:

• Lack of steady income
• Education expenses
• Costs of running the business

Setting up a retirement plan is a do-it-yourself job, just like everything else an entrepreneur undertakes. No human resources staffer is going to walk you through the company-sponsored 401 plan application. There are no matching contributions, no shares of company stock, and no automatic payroll deductions.

Youll have to be highly disciplined in contributing to the plan and, because the amount you can put in your retirement accounts depends on how much you earn, you wont know until the end of the year how much you can contribute.

Still, if freelancers have unique challenges when saving for retirement, they have unique opportunities, too. Funding your retirement account can be considered part of your business expenses, as is any time or money you spend on establishing and administering the plan. Even more important, a retirement account allows you to make pretax contributions, which lowers your taxable income.

Many retirement plans for the self-employed allow you, as a business owner, to contribute more money annually than you could to an individual IRA.

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Strategies For Saving When Youre Self

The joys of self-employment are many, but so are the stressors. High among those is the need to plan for retirement entirely on your own. You are in charge of creating a satisfying quality of life post-retirement. When it comes to building that life, the earlier you start, the better. Luckily, there are several retirement plans for those who are self-employed.

Retirement Planning While Self

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Being your own boss offers a lot of flexibility and opportunity for financial growth, but saving for retirement when you’re self-employed can be a difficult path to navigate.

Self-employed workers generally have many of the same retirement options, including saving on a tax-deferred basis, as employees. But many self-employed individuals don’t take advantage of these options and fail to take an important first step: They often don’t take the time to learn about the retirement savings options available to them and instead pay themselves first.

To help you avoid that trap, here is a look at four options that can be a part of a healthy self-employed retirement plan: traditional IRAs, Roth IRAs, SIMPLE IRAs and SEP plans.

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How Long Does It Take For A Small Business To Set Up A 401

Establishing a 401 can be a fairly straightforward process. However, without due diligence, that approach would be reckless and make your business vulnerable to expensive fees and risks associated with making hasty decisions regarding something as important as selecting a trustee. Depending on how much preliminary research you do, allow yourself ample time to create a plan document, establish a trust, notify employees, and launch your new benefit.

Solo 401 Contribution Limits For 2022

* A business owner employed by a second company and participating in its 401 plan should note limits on elective deferrals are by person, not by plan. Consider the limit for all elective deferrals you make during a year.

An alternative to the Solo 401 is the simplified employee pension individual retirement account . While both plans allow you to contribute a maximum of $61,000 each year, the SEP-IRA only allows you to contribute up to 25% of your income or $61,000, whichever is less.

Also, if you have a SEP-IRA and hire additional full-time staff, youre required to make contributions for those employees whenever you make contributions for yourself. It can be rolled over to a new 401 plan, whether it be solo or traditional, should you unexpectedly need to hire staff.

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How A Simple Ira Works

The SIMPLE IRA follows the same investment, rollover, and distribution rules as a traditional or SEP IRA, except for its lower contribution thresholds. You can put all your net earnings from self-employment in the plan, up to a maximum of $14,000 in 2022, plus an additional $3,000 if you are 50 or older.

Employees can contribute along with employers in the same annual amounts. As the employer, however, you are required to contribute dollar for dollar up to 3% of each participating employee’s income to the plan each year or a fixed 2% contribution to every eligible employee’s income whether they contribute or not.

Like a 401 plan, the SIMPLE IRA is funded by taxdeductible employer contributions and pretax employee contributions. In a way, the employer’s obligation is less. That’s because employees make contributions even though there is that mandated matching. And the amount you can contribute for yourself is subject to the same contribution limit as the employees.

Early withdrawal penalties are hefty at 25% within the first two years of the plan.

Take Advantage Of Employer Matching

You might think of your retirement savings as one of those fabulous champagne towers that youve never actually seen at any wedding youve personally attended. The top cups always get filled first before anything below gets even a drop of champagne. If money is the champagne in this metaphor, you the absolute tip top cup should be your employers Group Registered Retirement Savings Plan. Why? Because employers will often match a portion, or in some cases, 100% of what an employee deposits into her Group RRSP , basically free money for you that will make an extraordinary difference in terms of compounding gains over the long term. And because you can have your employer withhold funds to deposit directly into your GRRSP, not only will you not be tempted to spend money you were never paid, the money deposited will be pre-tax, meaning that a larger amount of money will get invested right away, versus investing yourself and having to wait six months to a full year to get that money back though a tax refund.

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Discover The Best Retirement Accounts And Plans

The absolute most important source of retirement income will be from your decades of investments through tax-advantaged accounts, like GRRSPs, RRSPs and TFSAs.

The first place you should put any retirement savings is in a work GRRSP that offers matching funds, and youre free to put up to 18% of your previous years income into one of these plans, up to a certain maximum dollar amount, which changes annually. The current max can be found here.

If you dont have access to a GRRSP with matching funds, you have a choice between investing through an RRSP or a Tax Free Savings Account . Like an RRSP, a TFSA is tax-advantaged, with one major difference. You receive immediate tax relief from an RRSP in that any amount you contribute wont be taxed until you withdraw it in retirement, and at that point, youll also pay taxes on any of the accounts investment growth. You will pay taxes in the current year on TFSA contributions but wont be required to pay taxes on the principle or the gains upon withdrawal. And unlike an RRSP, a TFSA is designed to be easily accessed before retirement if the funds are neededwhich is good, unless you happen to be the type whos never been able to resist smashing a piggy bank. TFSA are generally preferable for those earning less than $50,000 a year, for reasons more fully spelled out in this article.

How To Reduce The Fees You Pay

One particularly effective way to cut fees is to concentrate on investing in funds with lower MERs. Mutual fund managers may say you that their expertise is worth the fees, but, on the contrary, studies show that over the long term, the vast majority of professionals paid to pick stocks fail to outperform the market as a whole. So ideally you might seek average stock market results but reduce your fees as much as possible. This is easily attained by purchasing ETFs which are bundles of different equities that trade on exchanges just like stocks, and often mirror stock indexes like the S& P 500. ETFs’ MERs are generally a small fraction of those of those of actively managed mutual funds.

The other way to effectively reduce fees is by cutting investment management fees. A management fee of 1% is common among financial advisors. A relatively new entrant into the financial advisory world are whats called automated investing services, also known as robo advisors, which tend to create portfolios of low-fee ETFs for their clients for a fraction of the fee of a typical financial advisor. Do your research. Some robo advisors may be all digital and offer limited if any human support for clients. At the other end of the spectrum are those that offer unlimited human telephone support for every client.

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Aim To Save At Least 10% Of Your Income Each Year Automatically

An all too common mistake new investors make is that they focus on what to invest in, rather than how much to invest, says Rapplean.

âYounger investors get really hung up on the investment choices, when the focus really should be on your savings rate,â says Rapplean. Academic research suggests someone in their 20s needs to aim to save at least 10%â15% is even betterâto land at retirement in solid shape. If you get a later start, you will want to aim to save even more.

If you canât reach that threshold right now, donât get disheartened. Many people canât itâs equally important to get any amount of money you can into the market to start benefiting from compounding returns. Even small sums can become small fortunes over decades.

Who Is Eligible For A Solo 401

Solo 401 plans are intended for the self-employed. If you have employees and are looking for a retirement plan, then you have other options such as the or SIMPLE IRA, both of which allow you to provide tax-advantaged benefits to your employees. A lesser-known program called a SIMPLE 401 also allows businesses to set up retirement plans.

While solo 401 plans are intended for one-person businesses, there is an exception. The spouse of the business owner can also participate in the plan. With a spouse in the plan, your small business can really stash away cash for retirement. A qualifying couple could save as much as $114,000 annually in the plan, and even more if they were eligible for catch-up contributions.

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