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.
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.
Has Your Work Situation Changed? You Can Roll Your 401(k) Funds into a Self-Directed IRA
Do you have a retirement plan that is still with an employer where you are no longer working? If you have recently lost a job due to COVID-19, or are in job transition, make sure you don’t leave your old 401(k) plan behind. If yours is still with a previous employer, you can rescue those funds and roll them over into a self-directed IRA.
Right now, it’s unclear for many workers if or when there will be a new employer with a new workplace retirement plan. However, one thing is clear: opening an IRA (Roth or Traditional) is an option that enables individuals to make sure their retirement savings stay with them. Moreover, if that new retirement plan is self-directed, there is a much wider range of potential investment options available that account holders—not their employers—control.
Rollovers into self-directed IRAs
Since most 401(k) plans are limited in terms of allowable investments, rescuing and rolling over those funds into a self-directed IRA opens up the door to greater investment opportunity, without the limits imposed by most plan sponsors on the defined contribution plans they offer. As you may know from your existing 401(k), most of those plans are limited to investing in mutual funds or exchange traded funds, stocks, and bonds. Opening a new self-directed IRA will enable you to include an array of alternative assets that you may already know and understand, such as real estate, private equity, precious metals, hedge funds, secured and unsecured notes/loans, energy investments, and more.
Through self-direction, you’ll build a more diverse retirement portfolio, create a hedge against stock market volatility, and gain better control over your investment returns as part of your retirement strategy. You’ll also have the flexibility of buying and selling your investments when you choose, rather than according to a prescribed schedule that most 401(k) plans follow.
You can choose to do a rollover into a new Roth or Traditional IRA, or a SIMPLE or SEP IRA, depending on your employment status, overall tax situation and how far out you are from retirement. As always, we recommend you discuss your unique scenario with a trusted advisor. You may also have to check with the current plan administrator to see if there are any restrictions concerning the type of IRA allowed for a rollover from the existing 401(k).
How to roll funds over into a self-directed IRA
At Next Generation, our comprehensive starter kits walk you through all the steps needed and required documentation to submit in order to open a new self-directed retirement plan with us, and include a rollover form for Traditional, Roth, SEP, or SIMPLE IRAs (we have starter kits for other types of plans as well). Moreover, our helpful team of professionals are available to answer questions about opening a self-directed IRA or about the many types of non-publicly traded, alternative assets, these plans allow. You may schedule a complimentary education session; or you may contact Next Generation by phone at 888.857.8058 or by email at NewAccounts@NextGenerationTrust.com.
The SECURE Act and Self-Directed Retirement Plans
The SECURE Act, signed into law on December 20, 2019, is comprehensive legislation written to expand retirement savings, simplify existing rules, preserve retirement income, and improve plan administration. SECURE stands for Setting Every Community Up for Retirement Enhancement.
The bill mostly makes significant changes to workplace retirement plans; other provisions affect retirement plans in general, including self-directed IRAs. Here is a look at some of the changes, effective January 1, 2020.
For those who own a self-directed Traditional or Roth IRA:
- Increase in RMD age for Traditional IRAs – The required minimum distribution age is now 72. Individuals who turn 70½ in 2020 would not be required to take a minimum distribution until April 1st of the year in which they turn 72. This only applies to individuals who turn 72 in 2020 or later.
- Contribute to your Traditional IRA longer – Workers age 70½ and older with earned income may now continue contributing to a Traditional IRA—and continue building up retirement savings. This only applies to individuals who are turning 70½ in 2020 and later.
- Tax penalty exemption for birth or adoption of a child – For a qualified birth or adoption, the account holder can withdraw a total of $5,000 as an early distribution without the 10% penalty, when the distribution occurs within one year of the event. Income taxes still apply.
- Graduate student IRA contributions – Certain payments to graduate and postdoctoral students will be treated as earned income for IRA contribution purposes.
- No more stretch IRAs – The lifetime distribution option for certain non-spousal IRA beneficiaries is now eliminated and most non-spouse inheritors who are more than 10 years younger than the deceased IRA owner will be required to take all distributions within 10 years. Exceptions include beneficiaries who, at the time of the account owner’s death, are:
- Disabled or have certain chronic illnesses
- Within 10 years of the decedent’s age
- Minors (10-year payout period begins upon reaching the age of majority)
- Recipients of certain annuitized payments begun before enactment of the SECURE Act.
For business owners who have a SEP IRA, Solo 401k, or other qualified retirement plan:
- Longer deadline to establish a plan – Now employers may establish a qualified plan as late as their business tax filing deadline, including extensions, rather than the last day of the company’s business year. This extension will not apply to certain plan provisions.
- Increase in small-employer plan startup credit – Up to $5,000 per year, effective for 2020 and later taxable years, for employers with up to 100 employees over a three-year period beginning after December 31, 2019. The credit applies to SEP, SIMPLE, 401(k), and profit-sharing plans.
- Automatic enrollment credit – Employers that include an automatic enrollment feature in their new or existing small 401(k) plans or SIMPLE IRA plans will get a maximum annual tax credit of $500 for each of the first three years that the plan is maintained. (Effective for 2020 and later taxable years.)
- Participation by part-time employees – Employees who work at least 500 hours over three consecutive 12-month periods (and who satisfy the plan’s minimum age requirement) must be offered participation in the employer’s 401(k) plan.
All SECURE provisions have tax consequences for individuals and plan sponsors. As always, the team at Next Generation strongly recommends you consult your trusted advisor regarding how the SECURE Act provisions may affect your specific tax situation.
Secure a more diverse retirement portfolio through self-direction
In light of the recent changes, consider including alternative assets within a self-directed retirement plan. Those who are comfortable making their own investment decisions and who understand certain nontraditional investments can build up their retirement savings—and hedge against stock market volatility—with such assets as real estate, precious metals, private equity, hedge funds, private notes, and more.
At Next Generation, we’re here to answer your questions about self-direction as a retirement wealth-building strategy, or how certain provisions of SECURE may affect your self-directed retirement plan. You can arrange a complimentary educational session with one of our representatives, or contact us directly at 888.857.8058 or NewAccounts@NextGenerationTrust.com for more information.
Millennial Business Owners are Fans of Retirement Plans
Here’s something that may surprise you: younger business owners of the millennial generation are putting their employees’ retirement on their radar more so than their older counterparts (Generation X and baby boomers). According to a Nationwide survey, millennials are more aware of the importance of a workplace retirement plan and are nearly twice as likely as the average business owner to say they will offer retirement benefits to their employees in the future (69 percent vs. 36 percent).
Having grown up during the Great Recession, this generation has seen firsthand the importance of planning ahead financially. In addition to their own spending, money management, and retirement savings, they are thinking of their employees’ financial futures as well. The survey revealed that:
- Fifty-seven percent of millennial business owners think it’s their responsibility to help their workers save for retirement, compared to 44 percent of Gen X and 31 percent of baby boomer bosses.
- Fifty-one percent of millennials said a retirement plan is a good recruiting tool in a tight job market, to help attract and retain talent.
- Thirty-two percent of millennial bosses are increasing retirement contributions which is nearly double the overall figure (18% of all business owners).
Self-directed retirement plans for employees and employers
A SIMPLE IRA retirement plan can be established by employers, including self-employed individuals (sole proprietorships and partnerships) for the benefit of their employees. Eligible employees can contribute part of their pretax compensation to the plan. For individuals who are savvy about nontraditional investments, they can include those in their self-directed SIMPLE IRA. As you know, self-directed IRAs allow investors to include a wide range of non-publicly traded alternative assets, such as real estate, precious metals, lending and private equity.
If you are a business owner and would like to offer a SIMPLE IRA to your employees, or open a SEP IRA for yourself—or as an individual, you wish to open a self-directed IRA and build a more diverse retirement portfolio—Next Generation’s team can help you get started. Contact us at NewAccounts@NextGenerationTrust.com or 1.888.857.8058 today!
What is a SEP IRA ?
A SEP is a simplified employee pension plan. A SEP plan provides employers with a simplified method to make contributions toward their employees’ retirement and, if self-employed, their own retirement. Contributions are made directly to an Individual Retirement Account or Annuity (IRA) set up for each employee (a SEP-IRA). See Publication 560 for detailed SEP information for employers and employees.
Note: The IRS has a system of correction programs for sponsors of retirement plans, including SEPs, which are intended to satisfy Internal Revenue Code requirements but have not met the requirements for a period of time. This system, the Employee Plans Compliance Resolution System (EPCRS), permits employers to correct plan failures and thereby continue to provide their employees with retirement benefits on a tax-favored basis.
How is a SEP established?
- A formal written agreement must be executed. This written agreement may be satisfied by adopting an Internal Revenue Service (IRS) model SEP using Form 5305-SEP, Simplified Employee Pension – Individual Retirement Accounts Contribution Agreement. A prototype SEP that was approved by the IRS may also be used. Approved prototype SEPs are offered by banks, insurance companies, and other qualified financial institutions. Finally, an individually designed SEP may be adopted.
- Each eligible employee must be given certain information about the SEP. If the SEP was established using the Form 5305-SEP, the information must include a copy of the Form 5305-SEP, its instructions, and the other information listed in the Form 5305-SEP instructions. If a prototype SEP or individually designed SEP was used, similar information must be provided.
- A SEP-IRA must be set up for each eligible employee. SEP-IRAs can be set up with banks, insurance companies, or other qualified financial institutions. The SEP-IRA is owned and controlled by the employee and the employer sends the SEP contributions to the financial institution where the SEP-IRA is maintained.