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.
If you have any questions about the types of alternative assets allowed in a self-directed SEP IRA, SIMPLE IRA or solo(k), or how the transaction process works with a self-directed retirement plan administrator, schedule a complimentary education session with a Next Generation representative. Alternatively, we’re also available to answer your questions via phone at 888.857.8058 or by email at NewAccounts@NextGenerationTrust.com.
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.
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.
- 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.