The Self-Employment 401(K)

It is a common misconception among contractors and other self-employed individuals that they do not have access to a 401(k). The individual 401(k), aka a solo 401(k), has been a legal tax deferred retirement option since 2001. The problem has been, and still is, that very few people have heard of it and only a few investment companies offer the option. Vanguard, Fidelity, and E-Trade are all offering these plans now. Here are a few details about this retirement savings option.

 Solo 401(k) Details

• You can contribute up to 100 percent of the first $17,000 your business makes.
• Although it is called a solo 401(k) your spouse can be part of the plan if they work for your company.
• If you work for another company full time and have self-employment income on the side, you can contribute to your company's 401(k) and a solo 401(k), doubling your retirement contributions. In this situation, you can only contribute 25% of your profit instead of the $17,000 limit.

What Paperwork is Required

There is, of course, some government required paperwork to establish a solo 401(k). This is minimal, well minimal for the government. It may take up to an hour for the initial round of paper shuffling. Then there are some guidelines and filings to keep in mind. You will need a Federal Employer Identification Number(EIN), which takes all of five minutes to get online at irs.gov. You do not need the EIN if you are incorporated. If you are unincorporated, you will need to use the EIN for the 401(k) paperwork and enter it, along with your Social Security number, on Schedule C of your 1040 at tax time. If you find yourself in the enviable spot of having more than a quarter mil in the 401(k), you have to file an additional form with the IRS.

TurboTax versions that support self-employment income understand solo 401(k) contributions. This should help at tax time. Unfortunately, these accounts are so unheard of that some accountants do not know what to do with them. You may want to make your accountant aware of what you are doing so that they can get up to speed before it is time to file.

The guidelines and points of interest mentioned above are only a few of the items to be considered before you open an individual 401(k). Make a call to all three of the investment firms mentioned above and ask for information. Each may offer a different set of investment options within their plan. Once you have these in hand, talk to your accountant again. It never hurts to have a second opinion on where you are going to invest.

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How to open an IRA

Opening an Individual Retirement Account is a retirement planning decision. Depending on whether or not your IRA is a traditional, Roth or Simple IRA, opening an IRA can be subject to specific differences in regulation. To open a traditional or Roth IRA for a specific year usually requires 1) an application, 2) IRA disclosure terms, 3) an initial deposit, and 4) funding before the annual April, 15th tax deadline.

Where to find an IRA

IRAs are opened through IRS sanctioned financial institutions or 'custodians' that hold and maintain the account. Depending on the type of IRA, establishing the account may be a direct procedure between you and a financial institution or insurance company or via a third party such as an employer or financial planner. Financial Institutions are often eager to help with setting up an IRA. This can lead to considerable diversity in the products, services and costs associated with owning an IRA.

When choosing to open an IRA, looking for the option with the most financial potential helps optimize your retirement planning. Many financial institutions offer IRAs, however fees, investment products and maintenance can differ significantly between account custodians. For example, an insurance company IRA may have different reporting procedures and fees than a self-directed IRA through a brokerage firm.

How to qualify for an IRA

To qualify for a traditional IRA, which is not the same as a Roth IRA or Simple IRA, you must also meet the IRS requirements that include 1) having earned taxable income for all years that the IRA is invested in, and 2) being under the 70.5 year age limit for traditional IRAs. IRAs can be funded with any amount of value up to the annual contribution limit and within the minimum deposit parameters allowed by the IRA custodian.

In the case of employer funded IRAs such as a Simplified Employee Pension IRA your employer will be required to submit additional documentation such as an IRS Form 5305-Sep to the IRS. Individual Retirement Accounts can be rolled over, but must meet IRS authorized criterion. To find out if your IRA rollover is allowable contacting the IRS directly is a good way to find out. Sometimes an IRA may receive direct deposits of assets such as mutual fund shares held within another account.

The different types of IRAs

The differences between each type of IRA are relevant when determining how to open an IRA. For example, a Roth IRA is contributed to with taxable income and has no opening age limit whereas money placed into a traditional IRA is deductible from taxable income and can only be done so up to age 70.5. For an employer IRA such as a Simple IRA, funds are placed into the IRA before being paid out to an employee. Other variations include when withdrawals are required for traditional IRAs and annual contribution matching in the case of Simple IRAs.

Roth IRAs, unlike Traditional IRAs have income restrictions and cannot be funded if your Adjusted Gross Income is beyond the contribution cap. Married couples are allowed to have individual IRAs making the maximum contribution double per married household provided income limitations are met. Allowable annual payments to IRAs vary according to income, and tax filing status.

How to rollover a 403(b) into an IRA

A 403(b) is an employer pension plan similar to an Individual retirement account. In some cases, cessation of employment or changes in retirement planning may require one to shift the funds and/or assets that have accumulated within a 403(b) into an IRA.

There are specific ways to rollover a 403(b) into an IRA without incurring tax penalties and that can therefore save a taxpayer from making unneeded expenditures as a result of the rollover. This article will discuss the methods by which a 403(b) can be rolled over into an IRA without incurring tax penalties in addition to discussing potential advantages, disadvantages and options surrounding the rollover decision/process.

 Assess qualifying distributions and retirement strategies

Not all funds within a 403(b) may qualify for rollover into an individual retirement account. Specifically, annuity distributions, minimum distributions and hardship distributions cannot be rolled over. (www.money-zine.com) Moreover, becoming familiar with what can and can't be rolled over is important.

It may also be worthwhile to considering the possibility of retaining a 403(b), rolling over a 403(b) into another 403(b) with different financial options, a 401(k) or Roth IRA. For example, a 403(b) may have a matching plan and maximum contribution limits that far outweigh the benefits of rolling over into an IRA. Moreover, it may be advantageous from a retirement planning perspective to utilize the best available option for rollover, which may not necessarily be an IRA.

That said, if one decides to go ahead with the rollover due to cessation of employment, or other factors weighing the different types of individual retirement accounts may be helpful. To be sure of which rollover best suits one's financial planning needs, carefully considering all the options available within each retirement investment vehicle can be beneficial and help inform one as to the financial possibilities. Also, becoming aware of the rules, contributions amounts, taxation of, and age limits on various retirement plan options may help one be better prepared for the future.

Methods and tools for Rolling over a 403(b)

The first step in proceeding with a 403(b) rollover is speaking with the appropriate financial institutions, trustees and account managers to inquire about the process. Depending on the institution, account, financial instruments within the retirement plan etc. different forms may be required. A few of the possible forms needed are provided below.

Forms needed for direct 403(b)-IRA rollover (investopedia.com):

• Direct rollover transfer application
• Contribution form signed and dated by IRA institutions
• Distribution request form
• Acceptance of transfer from IRA provider

Additionally, the rollover cannot take more than 60 days upon receipt of funds from the recipient if the 403(b) beneficiary is the recipient. In other words, if one's employer and IRA servicer are not facilitating the rollover from start to finish, the money could pass through the pension beneficiaries hands. In order to avoid incurring tax on these funds they must be re-deposited and traceable as such into the IRA within the 60 day time limit

Determine the type of Individual Retirement Account (IRA)

Once one has performed the direct rollover of the 403(b) into an individual retirement account, that individual may want to roll it over to another IRA such as a Roth IRA. 403(b)'s cannot be rolled directly into an Roth IRA but the IRA can be rolled over into a Roth. IRA's and Roth IRA's have different rules, salary requirements and contribution age limits that may make a second rollover worthwhile. There are several benefits associated with Roth IRA's that could outperform the advantages of retaining a 403(b) or only rolling over into an IRA. Those benefits associated with Roth IRA's are listed below:

Advantages of a Roth IRA:

• Higher maximum contribution amounts
• More investment choices
• A Roth IRA can be held simultaneously alongside a 403(b)
• No age contribution limit
• Earnings may not be subject to taxation upon withdrawal
• No required withdrawal/distribution age
• Contributions are made with after tax income therefore is non-taxable after withdrawal
• Only earnings on maximum contributions are taxable
• Has exemptions for early withdrawal ex-education expenses

Summary

Rolling over a 403(b) into an IRA is a process within retirement planning and personal financial management that may come about due to changes in employment, available financial options, physical relocation etc.

After one has weighed the best financial options available and chooses to go ahead with a 403(b) rollover, the steps to rolling over funds without taxation should not be too complicated or take more than 60 days if one is adequately prepared and informed.

Once the rollover is complete, the beneficiary may also want to consider a second rollover into a Roth IRA if one qualifies for such. These decisions are the responsibility of the individual however and may be made with the assistance of a financial consultant.

Sources:

1. http://www.investopedia.com/ask/answers/142.asp
2. http://www.403bwise.com/wisemoves/irarollover_vt.html
3. http://www.fairmark.com/rothira/roth401k/compare-ira.htm
4. http://www.fairmark.com/rothira/taxable.htm
5. http://beginnersinvest.about.com/cs/iras/f/tradvsrothira.htm

How to Save For Retirement When You Are Short on Cash

Saving for retirement when you are short on cash can be accomplished even with a small weekly or monthly cash inflow. Ideally, in order for a saving method to work, some financial conditions must be met such as commitment to a budget and savings plan. Even when this is not possible however, there may be ways to redirect cash flow in such a way that it increases monthly savings; for example loan consolidation, adjustments to living space, cost budgeting etc. Saving for retirement when one is short on cash may seem impossible but it doesn't have to be. The following tips may assist in learning how to save for retirement when you are short on cash.

• Select an annual financial goal

Finding an amount that is affordable, and sticking to that goal from January 1 to December 31 of every year until retirement is crucial to success in this retirement savings plan. The following numerical breakdown will illustrate an example goal of saving $2000.00/year and how much money is required to be saved each day for that goal.

To save $2000.00 one must contribute $166.67 per month. If one has an income of just $250.00 per week that is 16.67% of one's monthly income. After 10 years of savings this amount becomes $20,000.00 with no interest. Theoretically, this may be easy to do, but it is not. Don't be fooled by mathematical wizardry because life pays no attention to formulas, plans or compounded interest.

• Account for overlooked expenses in a budget

When saving for retirement when short on cash, overlooked expenses can all too easily be figured into a budget without realistic inclusion. Expenses that are foreseen and unforeseen can effortlessly eat away at retirement plans and budgets on a daily basis. These expenses are not always of one's choosing and have the ability to cause one to give up on a budget and stop saving. What's more, such expenses might come around just as one is about to put the money into the savings account. A few of these expenses may be related to the following events:

i) Medical co-pays, and dental work
ii) Frivolous habits and spending patterns
iii) Budget breakers such as car accessories, car repairs, home maintenance costs
iv) Uncontrollable household expenditures arising from family 'needs'

In a savings plan one might be better off simply adding 10% to whatever the monthly budget to account for unwanted or unplanned expenses. These expenses are simply a fact of life and should not be ignored, even when one is short on cash and saving for retirement. The budget is also important. Establishing and creating a realistic budget that fits with one's income may take some financial ingenuity, material forfeiture and skill.

• Establish a household financial democracy

An organized household budget that saves for retirement when short on cash takes discipline, consistency and sometimes may involve sacrificing certain wants. In order to save money, it is commonly understood, one must generally without question, live within one's means. That may be easy enough to say and do independently, but convincing a whole household to do that is a great feat indeed. Essentially, each household might be best off with a comptroller or money manger who has veto power on all democratically arrived at expenditures. Without an organized and agreed upon saving plan, a budget may not survive and the retirement plan goes out the window.

• Prepare for an inevitable financial catastrophe

Even with a 10% unexpected expense budget, the inevitable financial catastrophe lies in wait, hiding in the dark corners of life waiting to feed its insatiable hunger on the finite pocket books of its victims. Knowing how to save for retirement when short on cash also involves dealing with a potentially inevitable financial catastrophe is very important to saving for retirement because it has the power to cause one to lose all hope in one's saving plan if it strikes.

In its most horrific and unpleasant form, the inevitable financial catastrophe can wipe out everything one has saved for retirement and this is simply unfortunate. However, there are means and ways to fend of the inevitable financial catastrophe such as the following:

i) Save an additional 2% every month for the Inevitable Financial Catastrophe
ii) Make financial sacrifices each month
iii) Place the above financial sacrifices in an untouchable savings account
iv) Do not, under any circumstances other than the Inevitable Financial Catastrophe, touch the money in the untouchable bank account

Using the example from paragraph 2 of this article, one must now save 19.67% of one's income to account for the inevitable financial catastrophe. That leaves just over 80% for the budget. In order to save according to the above example plan, 80% is all one has to live on. Take it or leave it.

Summary

Knowing how to save for retirement when you are short on cash can be assisted with a financial plan. Financial plans are many, and many of them are based on sound principles. However, the added component of real life has an astounding ability to thwart all but the most dedicated and disciplined of savers. In order to save when one is short on cash, one must simply stick to a budget, live within one's means, and save.

The above savings plan is an example of how one can save $2000.00 a year on a small income of $250.00/ week not including budget details. Creating and sticking to a budget that works is a unique and personal endeavor that requires financial fortitude, and fiscal discipline but it can be done in varying amounts with consistent income.

How to Set Up an IRA

An IRA is an Individual Retirement account that allows individuals to make annual contributions without taxation until the age of 59 . Detailed information on IRA's can be found in the Internal Revenue Services publications 575 and 590. After this age, withdrawals can be made from the IRA without early withdrawal penalty. Several types of IRA's exist, each with different rules and requirements. There are several steps that one can take to effectively establish, contribute to, and benefit from an IRA. This article will present a guideline by which and IRA can be set up.

Decide if an IRA is the right retirement instrument

Since there are several ways to save for retirement and hedge against taxes, a choice exists as to how one should go about planning for retirement and what investment vehicle(s) to choose. Individual Retirement Accounts can be used in conjunction with other retirement instruments but there is an annual limit to the amount an individual can contribute to an IRA.

Questions to consider when deciding to open an IRA can include how much excess money one has to contribute, what kind of percentage return on Investment to expect, and if the money deposited into the IRA will be needed before retirement. The answers to these and other questions can help one know whether an IRA is practical, feasible and profitable in terms of one's retirement goals.

Differentiate between types of IRA and determine qualification

When thinking about whether or not an IRA may be a good choice it may be a good idea to become familiar with the various types of IRA, if one qualifies to set up an IRA and what the benefits and advantages of different IRA's are. Some IRA's do not allow any early withdrawals whereas others such as the Roth IRA allow withdrawal of money earned on the original investment without penalty. However, unlike regular IRA's, Roth IRA's are not tax deductible but may qualify for a retirement tax credit.

Additional factors that determine whether or not one qualifies for an IRA include annual income, employment status, tax filing status and pre-existence of an IRA in one's name. Generally, to be able to contribute to an IRA, one's income must not be higher than $116K per year if single or $169K if married. One may also not intend to spend the money in an IRA or be very young in which case a Stretch IRA or Children's IRA may be more practical. Distinguishing and ascertaining which IRA is most suitable, may also be assisted by a representative from the financial institution with which one establishes the IRA.

Select an Employer IRA of Financial Institution to Set up the IRA with

Once one has decided if an IRA is a good choice and become familiar with the terminology, rules and types of IRA, a good next step is to research and contact financial institutions. Many financial institutions have IRA plans with various benefits and drawbacks. Some firms may offer convenience, flexible choice of investments, or favorable interest rates. Additionally, one may want to be sure the financial institutions one establishes and IRA through is also financially sound, reputable and suitable enough to be able to facilitate adjustments and/or rollovers of the IRA if need be.

Depending on the type of IRA one has, one may not require the direct assistance of a financial institution in initially setting up the IRA. In such case one may not have to make any contributions until the employment term ends at which point the IRA can be rolled over to another IRA account with a different organization. What's more, some employer funded IRA's have higher annual contribution amounts which may be part of an overall employment benefits package. Speaking with an employer about the IRA can help one understand whether or not one is able to and/or wants to continue funding the IRA through the employer.

Complete Paperwork and Sign

Once one has decided, considered and selected if, what type and which organization one wants an IRA with the next step is to read the IRA terms of service, contractual details and application materials. If the all the information is in accordance with one's knowledge, expectations and goals one may then complete the IRA application and/or paperwork to open the account.

This paperwork may also include privacy disclosures, automatic withdrawal and terms of agreement. After completing the paperwork one may then sign and date it and possibly write a check for the initial contribution amount. After this point the information and funds will be processed by the organization with which the IRA is established and the account them becomes active.

Summary

Individual Retirement Accounts may seem like an easy decision on the surface, but there are actually quite a few regulations, rules and variances that govern and differentiate IRA's. The steps outlined in this article can assist with the process of correctly setting up an IRA. Of significant relevance when opening an IRA, is a careful assessment of one's available funds, future cash flow, financial goals and preferences, and qualification status for opening the IRA.

After all is said and done, if one is not happy with the IRA after having set it up, or if one's situation changes, one may simply withdraw all the funds and close the account with penalty if done so before the pre-established age limit or roll over the IRA into another IRA without penalty.