Last Week’s Roundup!!

Here are some great links from last week!

JLP at All Financial Matters talks about: 

Index Mutual Funds or Exchange-Traded Funds? How About Both!

http://allfinancialmatters.com/2007/11/01/index-mutual-funds-or-exchange-traded-funds-how-about-both/

and 

A Question From a Reader: How to Calculate Taxes

http://allfinancialmatters.com/2007/10/31/a-question-from-a-reader-how-to-calculate-taxes/ 

At Money, Matter and More Musings folks were chirping about:

Things You Should Know About Percentage Traps

http://www.thetaoofmakingmoney.com/2007/10/31/536.html 

J.D. over at Get Rich Slowly discussed: 

A Brief Overview of Estate Planning Software

http://www.getrichslowly.org/blog/2007/10/31/a-brief-overview-of-estate-planning-software/ 

Jeremy at Gen X Finance breaks down:

When Owning a Home Isn’t Always All It’s Cracked Up to Be

http://genxfinance.com/2007/10/30/when-owning-a-home-isnt-always-all-its-cracked-up-to-be/

Meg at All Financial Matters explains:Millionaires Focus on Freedom 
http://allfinancialmatters.com/2007/10/29/millionaires-focus-on-freedom-2/
 

Please contact Dollars & Sense Education to bring our seminars to your company or organization! 

d_s_education_logo.gif 

Dollars & Sense Education – Raising Your Financial IQ!
www.daseducation.com
nicole@daseducation.com
215-499-3834

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Retirement Accounts for the Self Employed (Part 2 of 5) – The Solo 401K

So for all you self employed folks out there, this week is for you!  I am laying out all of your retirement plan options in gory detail.  For everyone else, take the week off from reading.  Grab a beer.  Watch Heroes:)  The first installment of this series discussed the SEP IRA.  Part 2 of this series explores another popular option: the Solo 401K. The next two entries will describe the other options available to the self employed and the last entry will discuss what options are appropriate for you according to the kind of business you have and your goals!

Do I Qualify For A SOLO 401K?

Any type of business with no employees, can establish an individual 401(k) plan – generally referred to as a Self-Employed 401(k), or Solo 401(k).  The business can be brand new or old. It can be a sole proprietorship, LLC, partnership, or corporation.

Where Do I Set Up a SOLO 401K?

Fidelity and T. Rowe Price offer SOLO 401Ks or 401kBrokers.com.

How Much Can I Contribute Annually to a SOLO 401K for myself?

For the tax year 2007 you can contribute up to $15,500 plus 20% of your business income, with a maximum contribution of $45,000 in 2007. You can make an extra $5,000 catch-up contribution if you’re 50 or older.
 

Why Not Just Open a Traditional or Roth IRA?

Do Both!   

When Do I Set This Up?

Each Self-Employed 401(k) must be set up no later than December 31, to be eligible for tax deductions for that tax year.

What If I Already Participate In My (Other) Employers Plan?

If you have a regular 401(k) through an employer and have some freelance earnings on the side, then your solo 401(k) limits will be reduced by any contributions you’ve made to a regular 401(k). But that only affects the first $15,500 of contributions, not the 20% of business income. So if you contributed $10,000 to a regular 401(k) through your employer, for example, then your solo 401(k) contributions will be limited to $5,500 plus 20% of your business income.

Do I Have to Put Away the Same Amount of Money Every Year?

No!

What If I Have Employees?

If you have employees you are not eligible for a SOLO 401K unless it is your spouse.

Anything Else?

Keep in mind that the eligibility requirements for having a self-employed 401k plan are quite strict. It’s not widely offered by most investment companies and those that do offer it provide limited investment options. And once you add a single employee outside of your spouse, you must convert to a traditional or SIMPLE 401k plan. 

Summary 

If work for yourself take full advantage of the tax benefits that affords you! A Solo 401K allows you to defer a significant portion of your retirement savings from taxes. Don’t let Uncle Sam get more than his fair share!

In the next installment of this series (Part 3 of 5) I will describe another kind of retirement account for the self-employed – The SIMPLE IRA!

Other great blog entries on Solo 401Ks:

http://www.mymoneyblog.com/archives/2007/10/fidelity-self-employed-401k-account-review.html

http://www.my-personal-finance-blog.com/2006/12/28/set-up-my-solo-401k/

http://taxplaya.typepad.com/tax_playa/2007/03/selfemployed_40.html

For the last article:

https://daseducation.wordpress.com/2007/10/08/a-retirement-accounts-for-the-self-employed-part-1-of-5-the-sep-ira/

A Primer on Retirement Saving (Part 5 of 5)

In Part 1 of this series, hopefully I convinced you of how important it is to save for retirement.  In Part 2, I talked about the different options that exist for retirement savings.  In Part 3, I discussed how to efficiently prioritize the options that exist for your retirement savings.  In Part 4, I discussed how and where you go to sign up for your 401K, 403B and IRA.  In this final installment, Part 5 of this series, I discuss good investment options for your IRAs, 401Ks and 403Bs.

1)    Determine the Appropriate Asset Allocation for Your Age and Risk Tolerance 
Diversification is a powerful investment concept.  It refers to saving your investments in different baskets.  Diversification requires you to place your money in different investments with returns that are not completely moving in the same direction at the same times.  When some of your investments are up, others will be down. To decrease your chances of getting clobbered at the same time, you must put your money in different investments such as stocks, bonds and cash.  You can further diversify your investments by investing in domestic as well as international markets.  The process of how you spread your money around and diversify is called “asset allocation”.  The wise approach is to have more risk (equities) in your younger years and as you move into retirement move the majority of your money into less risky assets (bonds and cash). There are many different ways to allocate your assets for retirement, but below I outline one possibility. 

Age:  Less than 40 years

Allocation:  100 % in stocks.  Of this, 40% invested in large cap-growth funds, 25% in small-cap growth funds, 25% in large-cap value funds, and 10% in international.

Age:  40 – 50 years

Allocation:  80 % in stocks and 20% in bonds.  Of the stocks portion, 40% invested in large-cap growth funds, 25% small-cap growth funds, 25% large-cap value funds, and 10% in international.

Age:  51 – 55 years

Allocation:  70% in stocks and 30% in bonds.  Of the stocks portion, 40% invested in large-cap growth funds, 25% small-cap growth funds, 25% in large cap value funds, and 10% in international.

Age:  55 – 60 years

Allocation:  50% in stocks and 50% in bonds.  Of the bonds portion, 40% invested in large-cap growth funds, 10% small-cap growth funds, 40% in large cap value funds, and 10% international.

Age:  60 – 65 years

Allocation:  Reduce stocks by 5% per year and increase bonds by 5% per year so that at retirement you have 25% in equities and 75% in fixed income.  Of the equity portion, 40% invested in large-cap growth funds, 10% small-cap growth funds, 40% in large-cap value funds and 10% international.

2)    Choose High Quality/Low Cost Funds
The second factor to take into account when you are choosing the mutual funds in your accounts is cost.   Typically the lowest cost funds that one can buy are index funds.  An index fund is a fund that merely tracks a specific financial market.  For example an S&P 500 index fund just copies the movement of large cap stocks.  A Russell 2000 index is used to track small cap companies.  Index funds do not have managers making decisions about what to invest in so they are less expensive.  They also tend to outperform actively managed, more expensive funds.  So if these are an option within your plan, take advantage of them to carry out your asset allocation strategy.   

If actively managed funds are your only option, invest in them but be wary of expenses associated with the fund. Actively managed funds have expense ratios and loads that eat into your returns.  Minimize these costs as much as possible!

3)    Rebalance Your Portfolio Annually
The great thing about investing for retirement is that once you are set up you really don’t have to do much.  Just once a year look at your portfolio and make sure your investments still match up with the asset allocation you want.  Because your investments grow at different rates, this can throw off your asset allocation.  Make sure you rebalance it every year!

I hope you have enjoyed this 5 part series on Investing for Retirement.  Please contact me with any questions or clarifications!

Please contact Dollars & Sense Education to bring our “Financial Health 101” seminar to your company or organization! 

Dollars & Sense Education – Raising Your Financial IQ!
www.daseducation.com
nicole@daseducation.com
215 – 499 – 3834 

A Primer on Retirement Saving (Part 4 of 5)

In Part 1 of this series, hopefully I convinced you of how important it is to save for retirement.  In Part 2, I talked about the different options that exist for retirement savings.  In Part 3, I discussed how to efficiently prioritize the options that exist for your retirement savings.  In this installment of the series, I will discuss how and where you go to sign up for your 401K, 403B and IRA.  Signing up for a 401K or 403B is quite easy.  Picking the right company for your IRA is more complicated.  In this post I will attempt to make picking a company for your IRA as easy as possible.

Where to Open a 401K and 403B 

If your company offers a 401K or 403B, opening one is quite easy.  Just contact the HR office of your company and ask them for the paperwork!   

Where to Open a Traditional or Roth IRA

1)    Full Service Brokerages – Merril Lynch, TD Ameritrade, Wachovia, etc.  These are my least favorite options unless you really feel like you cannot do this on your own.  They provide investment advice but are very expensive.  If you want to use this option you can go online to find your nearest branch office. 

2)    Online Discount Brokerages – ShareBuilder, Scottrade, Firsttrade, Zecco, ETrade etc. 
Discount brokers appeal to many people because they have low or no minimums to open an account. Short term, online discount brokerages can be a good alternative if you only have a small amount to invest (less than $1,000) and you are not willing to make automatic contributions of at least $50/month. If you are a mutual fund investor, opening an online brokerage account should only be a short term bridge to opening an account at one of the big three mutual fund companies.  Discount brokers are a good option if you’re primarily interested in purchasing individual stocks instead of mutual funds, but for most casual investors this is not advised.  
 

3)    Banks – Bank of America, Commerce Bank, Citizens Bank, Washington Mutual, etc. Another option if you’re short on cash to open an IRA at a mutual fund company is to open an CD-based IRA at a bank until you’ve saved enough for the minimum initial deposit at one of the three big mutual fund companies.  This is only a short term option. As soon as you have at least $1,000 you should be rolling you IRA over to a mutual fund company. 

4)    Mutual Fund Companies – In my opinion, mutual fund companies are the best place to open your IRA.  However, they have fairly high minimums for investing.  Fidelity Investments, The Vanguard Group and T. Rowe Price are the three largest mutual fund companies and signing up for all three can be done easily online.  I will provide key details for each company so that you can properly evaluate which company best suits your needs. 

Fidelity Investments

Fees: No fee.

Minimum Investment: $2,500 minimum initial deposit, but this is waived if you commit to at least $200/month automatic contributions.

Additional Contributions: Minimum of $250 unless you commit to at least $200/month automatic contributions.

The Vanguard Group

Fees: No fee

Minimum Investment:  $1000 minimum initial deposit to purchase the company’s STAR fund.  (The STAR fund is a mutual fund of mutual funds, a safe choice for beginners.)  Most other funds at Vanguard have a $3000 minimum.

Additional Contributions: Minimum of $100 unless you use their Automatic Investment Plan, in which case the minimum is $50.

T. Rowe Price

Fees: $10/year per mutual fund owned for Roth IRA accounts until you have a balance above $5,000 for each mutual fund or an aggregate of $50,000 invested, after which there is no fee.

Minimum Investment: Minimum of $1,000, unless you sign up to contribute at least $50/month in automatic contributions.

Additional Contributions: Minimum of $1,000, unless you sign up to contribute at least $50/month in automatic contributions.

How to Open an IRA

Some firms require that you download the forms and then to mail or fax them to the company. Most companies, however, provide online applications. Before you begin the application, you will need the following:

  • Social security number
  • Bank account information
  • Employment information
  • Money

Once you’ve completed the application process, you will be asked to transfer money to your account. This money will probably earn interest in a money market fund until you choose an investment. In the final installment – Part 5 of this series, we’ll discuss good investment options for IRAs and 401Ks. Stay tuned!

Please contact Dollars & Sense Education to bring our “Financial Health 101 seminar to your company or organization! 

Dollars & Sense Education – Raising Your Financial IQ!
www.daseducation.com
nicole@daseducation.com
215 – 499 – 3834