• The Reasons for a Roth Solo 401(k)

    Here is a way for a solopreneur to save much more for retirement.

     

    Provided by MidAmerica Financial Resources

                                                                                                                                    

    Self-employed? Seeking to ramp up your retirement savings? You should look at the potential of the Roth Solo 401(k). If you are a high-earning solopreneur, this savings vehicle may be a great choice because it allows you to make both employee and employer contributions to a 401(k) plan in the same year, with the potential for tax-free income in the future.1

     

    How does a Roth Solo 401(k) work? Think of it as a standard Solo 401(k) with an added Roth account. The magic word is Roth. You have the chance to make tax-exempt withdrawals from this 401(k) for retirement, in the manner of a Roth IRA.

     

    Employee and employer contributions to a standard Solo 401(k) must be made with pre-tax dollars. In the case of a Roth Solo 401(k), you make your employee contributions with after-tax dollars – they go into the plan’s Roth account. You get no immediate tax break by contributing after-tax dollars, but as a tradeoff, the contributions and earnings from the Roth account can eventually be withdrawn tax free (assuming you abide by IRS rules).2,3

       

    As an employee, you can defer up to $18,000 into a Roth Solo 401(k) in 2017. This amount will rise in future years, as it is indexed for inflation. Yearly catch-up contributions of up to $6,000 are also allowed for those 50 and over.1

     

    Your business may contribute a percentage of its yearly net earnings to the plan. The annual cap is 25% for incorporated businesses, 20% for LLCs and sole proprietorships. The asterisk here is that the employer contribution still has to be made with pre-tax dollars – it cannot be a Roth contribution.4,5

     

    Your total employer and employee contributions to the plan can be as large as $54,000 in 2017, $60,000 if you are eligible to make the aforementioned $6,000 Roth catch-up contribution. (The maximum amount of employee elective deferrals and employer non-elective contributions needs to be calculated using the methods detailed in IRS Publication 560.)1,5

      

    What range of investment choices do you have? Like an IRA, a Solo 401(k) is a self-directed retirement plan. That means you can invest your plan assets in myriad ways. A traditional 401(k) sponsored by a large employer typically gives you limited, garden-variety investment options.3

     

    What are the restrictions on these plans? As the name implies, they are reserved for the smallest businesses. To have any kind of Solo 401(k), you must work for yourself and have a maximum of only one other full-time employee (and that other FTE needs to be your spouse). If you foresee hiring people as your business evolves, then this is not the retirement account for you.1

      

    When the balance of your Solo 401(k) exceeds $250,000 at the end of a year, you must start to file Form 5500 annually with the IRS. Solo 401(k) plans are also subject to non-discrimination testing if you have common-law employees. (If you have an employee and you can control what will be done by that worker and how it will be done, that is a common-law employee by IRS definition.)1,6

     

    What if you want to participate in another employer’s 401(k) plan? You can have a Roth Solo 401(k) and do that, but if you do, keep in mind that your total employee contributions to 401(k)s for 2017 cannot exceed $18,000, $24,000 if you are 50 or older.2

     

    As you cannot deduct after-tax dollars, you cannot deduct your employee contributions to your Solo 401(k)’s Roth account. Your business, however, can still take a tax-deductible contribution for the profit-sharing contributions it makes with pre-tax dollars to your Solo 401(k) plan. In case you are wondering, participation as an employee in another 401(k) plan does not restrict the amount of the annual employer profit-sharing contribution you can make to your own plan. The 25%/20% net earnings cap still applies.2

       

    December 31 is the annual deadline. If you want to contribute to a Solo Roth 401(k) for a current tax year, you must create the plan by that date or earlier. Many self-employed people need to establish a retirement plan, and through a Solo Roth 401(k), you could go a long way toward fixing a retirement savings shortfall.7

         

    MidAmerica Financial Resources may be reached at 618.548.4777 or greg.malan@natplan.com. www.mid-america.us

     

    This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note - investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

     

    Securities and advisory services offered through National Planning Corporation (NPC), Member FINRA/SIPC, a Registered Investment Adviser.
    MidAmerica Financial Resources and Malan Financial Group are separate and unrelated companies to NPC.

     

     

    Citations.

    1 - irs.gov/retirement-plans/one-participant-401k-plans [10/31/16]

    2 - kiplinger.com/article/retirement/T001-C001-S003-self-employed-tax-free-retirement-roth-solo-401-k.html [7/24/15]

    3 - nerdwallet.com/blog/investing/roth-ira-roth-401k-roth-solo-401k-whats-difference/ [10/14/15]

    4 - forbes.com/sites/greatspeculations/2017/01/17/solo-401k-annual-contribution-limits-to-increase-in-2017/ [1/17/17]

    5 - mysolo401k.net/roth_solo_401k_contributions/ [1/18/17]

    6 - irs.gov/Businesses/Small-Businesses-&-Self-Employed/Employee-Common-Law-Employee [10/4/16]

    7 - mysolo401k.net/solo-401k-set-up-adoption-deadline-is-december-31/ [12/12/15]

     

  • Life Insurance Before Age 40

     

    Millennials have good reasons to obtain coverage now.

     

    Provided by MidAmerica Financial Resources

     

    Do you plan to buy life insurance before you turn 40? Maybe you should. You may save money in the long run by doing so.

     

    At first thought, the idea of purchasing a life insurance policy in your thirties may seem silly. After all, young adults are now marrying and starting families later in life than past generations did, and you and your peers are likely in excellent health with a good chance of living past 80.

     

    In fact, LIMRA – a life insurance research and advocacy group – recently surveyed millennials and found that 30% thought saving for a vacation mattered more than buying life insurance coverage. The perception seems to be that insurance is something to purchase when you start a family or when you hit your forties or fifties.1

     

    Getting a policy before you marry or start a family may be a great idea. The reasons for doing so might be compelling.

     

    Your premiums will be lower. The older you become, the more expensive life insurance becomes. Data compiled last summer by Life Happens, a non-profit life insurance education effort, confirms this.

     

    Life Happens asked several prominent U.S. insurers to supply their preferred premium rates for healthy non-smokers aged 25, 35, 45, and 55 buying a $250,000 whole life policy (the kind designed to build cash value with time). The average preferred premium rates for 25-, 35-, and 45-year-olds fitting this description were:

     

    25-year-old male: annual premium of $1,987

    35-year-old male: annual premium of $2,964

    45-year-old male: annual premium of $4,747

     

    25-year-old female: annual premium of $1,745

    35-year-old female: annual premium of $2,531

    45-year-old female: annual premium of $3,947

     

    The numbers starkly express the truth – whole life insurance premiums more than double between age 25 and age 45.2

     

    Premiums on term life policies are even lower. Term life insurance is essentially coverage that you “rent” for 10, 20, or 30 years – it cannot build any cash value, but in some cases, a term policy can be adapted or exchanged for a whole life policy when the term of coverage ends.

      

    If you are young, term coverage is remarkably cheap. NerdWallet recently researched term life premiums for healthy 30-year-olds. It found the following sample rates for 20- and 30-year term policies valued at $250,000:

     

    30-year-old male: annual premium of $156 for a 20-year term policy, $240 for a 30-year term policy

    30-year-old female: annual premium of $141 for a 20-year term policy, $206 for a 30-year term policy

     

    The downside of term coverage is that you are “renting” the insurance. Just as you cannot build home equity by renting a house, you cannot build cash value by “renting” a policy.3 

     

    A whole life policy may become quite valuable. As Life Happens notes, the average such policy bought at 25, 35, or 45 may have a guaranteed cash value of anywhere from $100,000-200,000 when the policyholder turns 65, assuming the policy is kept in force and no loans are taken from it. Universal life policies permit tax-deferred growth of the cash value.1,2

     

    Make no mistake, a whole life policy is a lifelong commitment. It must be funded every year or it will lapse. That should not scare you away from the value and utility of these policies – the cash inside the policy can often be borrowed or withdrawn. Sometimes families use cash value to fund college educations or help with medical expenses or retirement. Such withdrawals can lessen the death benefit of the policy, but what is left is often adequate. Cash withdrawals from a whole life policy are usually exempt from taxes, just like the death benefit.1    

        

    Maybe this is the time to put time on your side. Age-wise, life insurance will never be cheaper than it is for you today. Getting coverage now – even if you are single – may be a money-smart move as well as a great life decision. 

     

     MidAmerica Financial Resources may be reached at 618.548.4777 or greg.malan@natplan.com. www.mid-america.us

     

    This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note - investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

     

    Securities and advisory services offered through National Planning Corporation (NPC), Member FINRA/SIPC, a Registered Investment Adviser.
    MidAmerica Financial Resources and Malan Financial Group are separate and unrelated companies to NPC.

     

         

    Citations.

    1 - cnbc.com/2016/10/17/think-about-life-insurance-sooner-rather-than-later.html [10/17/16]

    2 - lifehappens.org/product-selector/comparing-the-cost-permanent-and-term-life-insurance/ [1/26/17]

    3 - nerdwallet.com/life-insurance#basic [1/26/17]