Has the COVID-19 Pandemic Affected Business Owners and Retirement Readiness?

COVID-19 has affected the American economy across a number of sectors and business owners nationwide are feeling the effects. Last month, TD Wealth released the results of a survey conducted in July among 1,296 business owners and individuals in two groups: high-net-worth business owners and individuals with investable assets of more than $500,000, and mass affluent business owners and individuals with investable assets between $100,000 and $499,000. The survey was about the pandemic’s impact on revenue and how or if that affected their retirement planning.

• The majority of respondents in both groups (67% and 73% respectively) said they were concerned about achieving their financial goals due to economic or political uncertainly.
• Among all business owners surveyed:
  • Eighty-seven percent said their revenue had been affected by the pandemic,
  • Forty-seven percent said they reduced their operations,
  • Twenty-five percent experienced temporary or permanent closures.

However, 85% of respondents said they had not altered their retirement planning in spite of the pandemic’s negative economic effects on their businesses. Further, it appears they feel retirement-ready:

• Of those with a long-term investment plan, 94% said they were somewhat confident of achieving their financial goals.
• Among the high-net-worth respondents, 94% expressed confidence about their financial plan generating the income they would need in retirement.
• In the mass affluent group, 82% said they were somewhat confident about having the retirement income they’d need from their financial plans.

The TD Wealth survey also showed that together, retirement savings and investment portfolios comprised more than half of the retirement income across all survey respondents.

Get Retirement Ready with Self-Directed Retirement Plans

Savvy business owners already know a lot about running their businesses and are already comfortable making decisions that affect their operations every day. They could be building a diverse retirement portfolio with a range of alternative assets they also know a lot about—and make their own investment decisions regarding those assets—with a self-directed retirement plan.

Business owners may open several types of self-directed retirement plans based on their business situations, with all having the same benefits as their traditional counterparts but with added advantages—the ability to include nontraditional investments they already know and understand, and create a hedge against stock market volatility.

SEP IRA: SEP stands for Simplified Employee Pension plan; it’s an easy, flexible, option if you are self-employed, or a partner or owner of a corporation with 25 or fewer employees.

SIMPLE IRA: For larger companies of up to 100 employees, the Savings Incentive Match Plan for Employees enables employers to make contributions towards their retirement as well as their employees’ retirement.

Solo 401k: The individual/solo 401(k) is for sole proprietors who employ only themselves, their spouse, or partners. It has deduction and contribution benefits similar to a regular 401(k).

At Next Generation, we offer free education to help individuals make informed decisions about which type of self-directed retirement plan to open—including Traditional and Roth IRAs as well as health savings accounts (HSAs) and education savings accounts (ESAs). We always recommend you speak to a trusted financial or tax advisor who knows your specific financial situation to determine if, as a business owner, a SEP IRA, SIMPLE IRA, or Solo(k) will be the plan to help you meet your financial goals.

Once you decide which type of account to open, we make it easy with our starter kits and detailed instructions for funding a new account. As a self-directed investor the rest is up to you—selecting and researching the alternative assets you wish to include, conducting your full due diligence on each investment, and then providing Next Generation with instructions to execute the transaction.

If you are interested in learning more about self-direction as a retirement strategy, please sign up for a complimentary educational session with one of our representatives. Alternatively, you may contact our team directly via phone at 1.888.857.8058 or email NewAccounts@NextGenerationTrust.com.

Suddenly Become Self-Employed? We’ve Got a Retirement Plan for You.

Has your furlough become permanent or have you decided not to return to your place of work due to the COVID-19 pandemic? Is it time to turn a long-time interest into a business? If so, you are among the many older Americans who have recently joined the ranks of the self-employed, or are now semi-retired and working a nontraditional job. If that’s you, putting a tax-advantaged retirement plan in place is a smart step along your entrepreneurship and/or nearing-retirement journey.

Deciding how to approach your new employment situation and retirement strategy depends on certain factors. Perhaps you already have an established IRA you’ve been contributing to over the course of your career, with ample savings there and Social Security benefits on the horizon—but you like the idea of continuing to work in some capacity. Or maybe you had an employer-sponsored retirement plan but have separated service from that employer—in which case, you can roll those funds over into a new retirement plan.

With the sudden change in status from W-2 employee to independent contractor or business owner, you may not be aware of the self-employment taxes that come along with this new phase of your working life. You can continue to beef up your nest egg with several different retirement plans that also provide shelter from those taxes—and can all be self-directed.

Three ways for the self-employed to save for retirement

While you may continue to contribute to an existing Traditional or Roth IRA, there are additional options for the self-employed to consider, each with distinct tax advantages: a SEP IRA, SIMPLE IRA, or a solo 401(k). Plus, if you open a self-directed retirement plan, you can include many alternative assets and build diversity into your retirement portfolio through the nontraditional investments these plans allow—like real estate, private equity, lending, hedge funds and partnerships.

A solo 401(k) is for individuals operating an owner-only business (a spouse may also participate) and can replace your employer-sponsored 401(k) plan. Note that employee elective deferrals must be made by December 31; the employer contribution can be made upon calculating and finalizing the net income when doing the tax returns (March or April of the following year).

Qualifying for each type of plan depends on whether you are entirely self-employed or also still working for a company with a retirement plan (to which you may still contribute). These plans not only help individuals maximize their retirement savings—they are tax-saving tools as well, with different contribution strategies for each type of plan and according to your specific financial situation. Therefore, we recommend you review and discuss these with your trusted advisor to maximize your tax-saving opportunities.

Need more information? Contact us today.

Retirement Plan Contribution Limits for 2021

The IRS has announced 2021 contribution limits in its Notice 2020-79, which covers various types of retirement plans, including workplace retirement plans and individual retirement arrangements (IRAs). These figures apply to regular and self-directed retirement plans. The deadline to contribute to your retirement plan for the 2020 tax year is April 15, 2021.

Contribution limits remain the same. Note that once again, there is no change for Traditional and Roth IRA contribution limits, which remain at $6,000 per account holder per year. Note that taxpayers may be limited in their contribution limits to a Roth IRA, or be prohibited from contributing at all, based on modified adjusted gross income (for single filers and/or those filing jointly), as detailed by the IRS.

Catch-up contributions—the additional retirement plan contributions allowed for taxpayers ages 50 and over–will also remain unchanged:

• For IRAs (Traditional, Roth) – $1,000
• For SIMPLE IRA and SIMPLE 401(k) plans – $3,000
• For 401(k), 403(b), and 457(b) plans – $6,500

Deductibility phase-outs. Depending on income levels and types of retirement plans, taxpayers may be eligible to take a yearly tax deduction for the money they contribute to an IRA each year (this does not apply to a Roth IRA, which is treated differently for tax purposes), but there are criteria for this. Contributions to a SEP or SIMPLE IRA are also deductible but you should consult your tax professional for guidance about those.

For taxpayers who participate in employer retirement plans, there is an IRA deductibility phase-out based on modified adjusted gross income (MAGI); for 2021 this will rise slightly in each category as follows:

• Single taxpayers – $66,000 to $76,000 (up from $65,000 to $75,000)
• Married joint filing taxpayers – $105,000 to $125,000 (was $104,000 to $124,000)
• Married with a spouse who is an active participant in employer plan – $198,000 to $208,000 (formerly $196,000 to $206,000)

Roth IRA eligibility ranges will increase. Because Roth IRA contributions are made on an after-tax basis, the rules are different in terms of eligibility to contribute, based on MAGI:

• For determining the maximum contribution for married joint filers, the phase-out range will be $198,000 to $208,000 (up from $196,000 to $206,000).
• For determining the maximum contribution for single filers and heads-of-households, the phase-out range rises to $125,000 to $140,000 (up from $124,000 to $139,000)

Employer-sponsored plans. Most but not all workplace retirement plans will not see a change in annual additions, deferral limits, and other criteria. For example, defined contribution plan additions increase to $58,000 (up $1,000 from 2020) but there is no change for defined benefit pension plans. Certain income thresholds will go up. Your employer plan administrator should have that information available to you.

Potential tax credits. Taxpayers who make contributions to IRAs or deferral-type employer-sponsored retirement plans of up to $2,000 may be eligible for a special income tax credit, referred to as the “saver’s credit.” Depending on modified adjusted gross income, it could be 10, 20, or 50 percent of the amount contributed, and differs for joint filers, heads of households, and singles.

Potential retirement wealth boosters—self-directed IRAs

Whether you’ve already contributed your maximum allowed amount for 2020 or you are still making contributions to your retirement plan, you can boost your retirement savings with a self-directed IRA. Whether Traditional or Roth, SEP or SIMPLE, self-directed retirement plans put you in control of your investments by allowing you to include a broad range of alternative assets in your account. For individuals who are comfortable making all their own investment decisions, are able to conduct full due diligence about nontraditional investments, and want to create a hedge against stock market volatility, a self-directed IRA can be a powerful tool to build a more diverse retirement portfolio.

Read more about the many options and benefits of self-direction on our FAQs page.  If you have questions about this retirement strategy, you can arrange a complimentary educational session; or contact our team directly via phone at 888.857.8058 or email at NewAccounts@NextGenerationTrust.com.

The Answer to the DOL’s Final Rule on Environmental, Social and Governance (ESG) Investments

The Department of Labor (DOL) has issued a final rule, “Financial Factors in Selecting Plan Investments,” concerning environmental, social and governance (ESG) funds in private employer-sponsored retirement plans, such as 401(k)s. While the final rule does not prohibit these investing choices for workplace retirement plans, its goal is to provide clear regulatory guidelines for ERISA plan fiduciaries, with the suggestion that ESG investing conflicts with their fiduciary responsibilities.

ESG investments advance positive social change such as improving the environment or promoting human rights. According to the DOL, decisions about these investments are not primarily pecuniary (in other words, determined and expected to be in the plan participants’ best financial interests, with a material effect on the risk and return), so plan fiduciaries may be cautious about recommending or including them in the workplace plans.

According to DOL Secretary Eugene Scalia, rather than further social goals or policy objectives, “This rule will ensure that retirement plan fiduciaries are focused on the financial interests of plan participants and beneficiaries, rather than on other, non-pecuniary goals or policy objectives.”

Therefore, employees who are saving for retirement through a 401(k) or other workplace plan may now experience some roadblocks when it comes to including ESG funds or individual investments in their retirement plans.

ESG investments can be held in self-directed IRAs as an alternative
Self-directed IRAs allow individual investors to embrace social investing and include alternative assets that align not only with their financial goals but their values as well. For example, the self-directed IRA can invest in funds and initiatives that combat climate change, nefarious labor practices, or human trafficking; or support green energy, fair trade cooperatives, and other investments that address inequities in the economic landscape, promote sustainability, and support positive governance practices.

With a self-directed IRA, investors have access to the same types of account types as they would with a brokerage firm, such as a Traditional IRA, Roth IRA, SEP IRA, or even a Solo 401(k).  Individuals with these retirement plans can include a broad array of non-publicly traded alternative assets in addition to ESG-related assets, such as real estate, private equity, hedge funds, precious metals, private lending and more.

Need more information? Contact us today.

Social Security Cost of Living Adjustment (COLA) for 2021

It was announced in mid-October that Social Security beneficiaries will see a 1.3% cost- of-living adjustment (COLA) in their monthly distribution checks, effective January 1, 2021. The Social Security Administration says this is in line with prior years’ increases, although it is slightly smaller than the 1.6% increase in 2020 and a more significant 2.8% bump to monthly checks in 2019. Looking back over a longer timeline, the COLA was zero several times (2010, 2011, 2016) and only 0.3% in 2017. Back in the 1970s and 1980s, the figures are much higher, ranging from around 6% in 1977 to 14% in 1981.

Given the financial effects of the COVID-19 pandemic on many Americans, including those receiving Social Security checks, that 1.3% increase won’t go too far in many areas of the country. According to the Social Security Administration, the average monthly benefit increase will be as follows for various categories of recipients:

• All retired workers, $20
• Aged couples who both receive benefits, $36
• Disabled workers, $16

Some other changes coming in 2021 are:

• The maximum amount of wages taxed for Social Security goes up from $137,700 now to $142,800 in 2021.
• For those of full retirement age, the maximum monthly retirement benefits are going up from $3,011 to $3,148 a month in 2021.
• In addition, the full retirement age is once again inching up based on year of birth.

Calculating COLA
The cost-of-living adjustment is based on the consumer price index for urban wage earners and clerical workers. However, this formula focuses on younger workers under age 62, who are not claiming benefits nor having Medicare payments deducted from their monthly Social Security income. Let’s not forget the rising costs of living seniors face in general, which outpace that COLA amount—food, housing, and prescription drugs among them.

There is a groundswell to change the COLA calculation to the consumer price index for the elderly instead. This is the Social Security 2100 Act, which is being put forward by Congressman John Larson of Connecticut. It expands benefits for current and future recipients, cuts taxes on the elderly, and aims to keep the Social Security Trust Fund solvent through the rest of this century.

Social Security is not so secure
Any way you slice it, relying heavily (or in many cases nationwide, solely) on Social Security for one’s retirement income does not bode well for today’s retirees —especially right now, when the fund is scheduled to be insolvent by 2033. Being more proactive about retirement saving can provide more stable financial health during one’s working and retirement years.

While Social Security benefits provide a financial safety net as per the program’s original intent, in today’s world, those benefits don’t stack up for individuals seeking to retire comfortably and maintain their accustomed lifestyle. That’s where self-directed IRAs and the nontraditional investment they allow can really shine.

Self-directed IRAs allow account owners to include a broad array of non-publicly traded, alternative assets, such as real estate, private equity, notes/loans, precious metals, and so many more. Self-directed investors can be proactive as well as nimbler about how they invest for their later years. That’s because, as individuals who make all their own investment decisions, self-directed investors can take advantage of market shifts and opportunities, and invest in many alternative assets they already know and understand, and that provide a hedge against stock market volatility.

Need more information? Contact us today.

Has the Pandemic Affected Your Retirement Confidence?

The Transamerica Center for Retirement Studies issued its 20^th annual survey of retirees last month, titled “Retirees and Retirement Amid COVID-19.” The report focuses on financial stability and readiness in retirement amid the pandemic. Findings are based on a survey done in November/December 2019 and again in June 2020; it polled people 50+ years of age who consider themselves fully or semi-retired, and who worked for a for-profit company for the majority of their careers.

The study reported that among those retirees surveyed:

• The majority (76%) stated their confidence in being able to maintain a comfortable lifestyle has not been altered by the pandemic. Among that group, 29% are “very confident” and 47% are “somewhat confident.”
• A smaller group, 15%, cited a decline in confidence in light of COVID-19 while 4% reported increased confidence in financial stability.
• Social Security will be/is the primary source of income for 69% of respondents, but 40% have other savings and investments (such as checking and savings accounts, retirement plans, credit cards).
• Approximately 35% of retirees said they expect income streams from IRAs and workplace retirement plans with another 30% of retirees saying they have company-funded pension plans.

However, eating into the financial security for nearly half of those surveyed is household debt (student loans, car loans, credit cards, medical bills) and nearly a quarter of respondents are paying off mortgages.

Even though many retirees are not feeling shaken financially by COVID-19’s economic ramifications, Transamerica noted that relatively few were “very confident” before the pandemic. The study concluded that many retirees are in danger of outliving their financial resources or lack income to cover healthcare expenses or pay for long-term care. Another sobering revelation: the lack of a financial strategy for retirement. Of those who said they have a plan (58%), only 18% have it in writing. That leaves 42% without a financial strategy amid the pandemic.

Self-directed retirement plans—an effective financial strategy at any time
Self-directed IRAs are ideal for investors who are confident in making all of their own investment decisions, and those who may already be investing in alternative assets outside of a retirement plan. Whether you are in your early- or mid-career phase, nearing retirement, or already retired, you have the option to use the many different nontraditional investments allowed through self-direction to build retirement wealth.

Self-directed IRAs enable investors to include a wide range of non-publicly traded alternative assets that typical plans do not allow, such as real estate, private equity, social causes, precious metals, secured and unsecured loans, and many more. In short, while the pandemic and politics can create instability in the stock market, self-directed IRAs provide a valuable hedge against that volatility, with a more diverse retirement portfolio and better control on investment returns.

Need more information? Contact us today.

Further Expansions to “Accredited Investor” Definition

Last month, the Securities and Exchange Commission amended its “accredited investor” definition that goes beyond income and net worth criteria; the expanded definition allows investors to qualify based on defined measures of professional knowledge, experience, or certifications. There is also an expanded list of entities that may qualify as an accredited investor, including tribal governments, family offices and certain other organizations.

This status allows individuals to participate in private placements—equity investments such as those allowed in self-directed IRAs. This amendment to the final rule aligns with self-directed investing in another way—using an investor’s knowledge or experience as a basis for participating in investment opportunities. Self-directed investors make their own investment decisions about the alternative assets they wish to include in their retirement plan, based on what they have researched, know, and understand—decisions not based solely on wealth.

The SEC’s previous rule used income or net worth as factors of financial sophistication—individuals had to meet the test of a net worth of at least $1 million excluding the value of primary residence, or income of at least $200,000 each year for the last two years (or $300,000 combined income if married). The amended rule goes beyond wealth as the criterion for purposes of the accredited investor definition.

What the amendments include
The amendments revise Rule 501(a), Rule 215, and Rule 144A of the Securities Act to:

• Include as accredited investors, with respect to investments in a private fund, natural persons who are “knowledgeable employees” of the fund
• Clarify that limited liability companies with $5 million in assets may be accredited investors
• Add SEC- and state-registered investment advisers, exempt reporting advisers and rural business investment companies (RBICs)
• Add a new category for any entity, including Indian tribes, governmental bodies, funds, and entities organized under the laws of foreign countries
• Add family offices with at least $5 million in assets under management and their “family clients,” as each term is defined under the Investment Advisers Act
• Add the term “spousal equivalent” so that spousal equivalents may pool their finances for the purpose of qualifying as accredited investors

Self-directed IRAs for investors of all kinds
Several years ago, the SEC implemented the JOBS Act in full, which opened up equity crowdfunding platforms to even more individuals, including nonaccredited investors who did not meet the income/net worth tests but wanted to take advantage of equity funding opportunities. For those who want to be angel investors in an early-stage company and/or wish to participate in equity crowdfunding platforms, a self-directed IRA is a valuable vehicle for making these types of investments. The flexibility of these retirement plans and the many non-publicly traded, alternative assets, they allow offer a great way to build a diverse retirement portfolio—and a hedge against stock market volatility with potential to earn greater returns.

At Next Generation, we’re here to help our clients understand the many options available to them as self-directed investors.

Need more information? Contact us today.

Could Your IRA Use More Love Next Year Due to the Pandemic?

In late July, Republican senators introduced legislation that would allow people to make catch-up contributions to their IRA, 401(k) and similar retirement accounts in 2021 and 2022, should they be unable to make full contributions this year. The bill, called the “Addressing Missed-savings Opportunities for Retirement due to an Epidemic Act” (AMORE Act) was introduced by Senators Ted Cruz, Thom Tillis, David Perdue, and Kelly Loeffler. It is designed to help individuals facing financial challenges resulting from COVID-19.

Usually, catch-up contributions are for workers age 50+ who wish to contribute more than the standard limit to their qualified retirement account; for 2020, the standard Traditional/Roth IRA contribution limit is $6,000 a year and the catch-up limit for individuals aged 55 and older is $7,000. However, with millions of Americans unexpectedly unemployed or working at reduced hours and/or wages due to the COVID-19 pandemic, the AMORE Act recognizes the challenges in maintaining their retirement savings goals.

The legislation will allow Americans with IRAs and other qualified retirement plans to catch up on their savings as the economy—and their financial situation—recover. Individuals would be allowed to make the catch-up contributions in 2021 and 2022 equal to the difference between their actual contributions for 2020 and current federal limits on these accounts.

For example, Judy is 45 years old and has contributed $5,000 so far to her IRA this year; she won’t be able to contribute any more in 2020 due to being furloughed. However, under the AMORE Act, she would be able to make a catch-up contribution in 2021 and 2022 for any unused contribution in 2020 – in Judy’s case, an additional $1,000.

Here’s another way to catch up: self-direct your IRA

Self-directed investors—that is, individuals with a self-directed IRA—have the ability to include many nontraditional investments within their retirement plans, such as real estate, private equity, notes/loans, social causes, and more. Self-direction provides a hedge against stock market volatility, allows individuals to diversify their retirement portfolios, and gives way for better control over their earnings – which could be seen as another form of a “catch up.”

These types of accounts are ideal for investors who already know and understand alternative assets and might already be investing in them outside of their existing retirement plan. Self-directed IRAs come with the same tax advantages as their regular counterparts, so investors can grow their retirement savings either tax-deferred or tax-free, depending on the type of plan.

Need more information? Contact us today.

Get Schooled on Self-Directed Education Savings Accounts

There are several investment/savings options available to individuals who want to give the gift of education to children. An education savings account (ESA) is an excellent supplement to other education savings (such as a 529 plan) with tax advantages. Also called a Coverdell Education Savings Account, this is a trust account created by the U.S. government.

An ESA may be used to cover qualified expenses related to primary, secondary, or higher education, from kindergarten through college or post-secondary trade school. Withdrawals are tax free (free from federal income tax) when used for eligible expenses. These include tuition, books and supplies, computers/equipment, transportation, school fees, and room & board. Children attending public school or private school may use the funds for qualified expenses.

Self-directed ESA investments

As with any other type of self-directed plan, an education savings account can include a range of alternative assets. Depending on need and time horizons for taking qualified withdrawals, there are opportunities to boost the $2,000 annual contribution limit through nontraditional investments such as private equity, secured and unsecured loans, real estate, precious metals, and many more.

For example:
Baby Sarah’s grandparents want to contribute to her education and open a self-directed ESA – they can contribute up to $2,000 annually. Sarah’s parents are also putting money away for the baby’s education. They plan to register her into public elementary school but may consider private middle/high school.

Every year, Sarah’s grandparents contribute $2,000 into her ESA, and begin investing the funds in an alternative asset with which they have years of experience.

As the value of Sarah’s ESA grows beyond the $2,000 annual contributions, she will have funds to use for books and supplies or can withdraw funds to cover tuition costs at a private high school or for college, to supplement her parents’ savings. Plus, her grandparents can continue to contribute to the ESA until Sarah turns 18—and continue to diversify the accounts’ holdings through other self-directed investments they already know and understand.

Their $36,000 gift over those 18 years can grow exponentially through the power of nontraditional investments not typically affected by the stock market, provide Sarah with more money to use for her education, and give mom and dad a little help along the way.

ESA facts

• Contributions may be made for beneficiaries until they turn 18; funds must be used within 30 days of the student turning 30 years old. (There are certain exceptions for special needs students.)
• The funds in the account can be transferred into another ESA for a relative under 30 years old.
• The total maximum contribution for any single beneficiary (even with multiple education savings accounts) is $2,000 per year.
• Contributions are considered gifts by the IRS and are not tax deductible.
• There are income guidelines regarding who may contribute. The 2020 limits are as follows:
  • For a married couple filing jointly with modified adjusted gross income (MAGI) between $190,000 and $220,00, a partial contribution is permitted; for those with less than $190,000 MAGI, the full $2,000 contribution is permitted.
  • Solo tax filers must have MAGI of $95,000-$110,000 to make a partial contribution, and less than $95,000 MAGI to make the full $2,000 contribution.
• Corporations and trusts may contribute to an ESA without the restriction on adjusted gross income.
• There is a 10% IRS penalty on earnings (with certain exceptions) for non-qualified withdrawals.

If you have questions about how to get started or about the alternative assets allowed in self-directed accounts, you can schedule a complimentary educational session with one of our knowledgeable representatives. Alternatively, you may contact us at directly via phone at  888.857.8058 or send an email to NewAccounts@NextGenerationTrust.com.