Many employers are implementing 401(k) matching programs again. In recent years, matching was greatly reduced or eliminated in most businesses. While many are reinstating their matching programs, there are many who still have not started yet. In addition to this, some employers are matching at a lower percentage rate. Research shows that about 75 percent of employers that stopped matching have restored their plans. From this group, about 75 percent have implemented matching plans at the same rate they used before. Less than 5 percent increased their rate. Almost 25 percent lowered their percentage rate.
It’s apparent that many employers want to reinstate their plans only when they can afford to do so. Since their ability to reinstate is dependent upon the economy, it’s difficult to predict when that will happen for each individual company. It’s no surprise that defined contribution plans that lack matching offers have a considerably lower rate of participation than plans that offer matching. This is likely the root of the many problems employers will face in the future when their older employees retire without saving enough money in an efficient and timely manner.
Research shows recent workforce statistics suggesting that approximately 40 percent of working Americans are 55 or older. This is a significant increase from the statistics gathered 20 years ago. When this recent statistic is considered from a financial point of view, it shows that older workers are likely to be less engaged in their work and are more expensive in general. Many of them may be staying at their jobs because they have to do so in order to collect retirement benefits. They often do not have a desire to be at their job aside from potential retirement benefits and a paycheck.
Older workers’ entrenchment in the workforce often results in younger employees not receiving promotions. This fact should encourage more employers to push retirement benefits to workers of all ages by reinstating or implementing a matching offer. This will encourage participation for both younger and older employees. While this idea sounds like an excellent solution, many companies are still hesitant to implement a matching plan because they’re worried about the economy falling into a recession again. Although research shows that many companies want to reinstate matches, many have still not followed through. This has also made employees nervous. However, there are still options to consider for retirement income. Be sure to discuss any concerns or issues with an agent.
Understanding Sep-IRAs
SEP-IRAs, which are treated the same as regular IRAs, are used by business owners to offer their employees retirement benefits. Funds may be invested in the same way as other IRAs. For self-employed individuals, there is no large administration charge. However, if the self-employed individual has employees, the same benefits must be offered to them. IRS Pub 560 provides full details about SEP products. The establishment and contribution deadline is the same as the employer’s filing deadline for tax returns or extensions. While eligibility may come with restrictions, they must not exceed the following:
– Must be at least 21 years old.
– Received $500 or less in compensation during the tax year.
– Has worked for the employer for three years or more during the past five years.
When qualified withdrawals are made after the age of 59½, regular tax rates are used for SEP-IRA funds. Contributions are deductible, and they are a good way to lessen individuals’ income tax liabilities. However, it is important to keep contribution limits in mind.
Contribution Limits
Contributions to SEP-IRAs are treated as parts of profit-sharing plans. Employers may make contributions to employees’ accounts that equal up to 25 percent of their wages. For example, if a worker brings in $100,000 in one year, the employer could contribute up to $25,000. Contributions should not exceed this percentage or the annual contribution limit, which is a specific dollar amount. Since this amount may change each year, it is best to discuss the current limit amount with an agent. Employers may make contributions until the date when their annual return is due.
Self-Employment Considerations
Contribution limits for self-employed individuals are more complex. The percentage is less than the amount for those who work for someone else. Computation formulas for this number can be found in IRS Pub 560. It is best for self-employed individuals to discuss the current percentage and contribution options with an agent. There are two specific issues affecting self-employed contributors, which are reduced rates and the FICA tax.
1. Reduced Rate
The limit of 25 percent for workers contributions applies to wages. However, it does not apply to net profit. If a business is set up as a sole proprietorship, the owner pays his or her own wages. He or she may also contribute up to 25 percent of wages, which is equal to the profits minus the contribution to the SEP. The CR reduction results in a 20 percent contribution rate.
2. FICA Tax
Contribution limits are computed from net profit adjusted with the self-employment tax deduction. The adjusted net profit amount is slightly higher than the net earnings. To learn how this amount is computed, discuss the process with an agent.
In summary, 20 percent of 92.9 percent of net profit is the overall contribution limit. Keep in mind that proposed deductions for contributions are included in net earnings.
Valuable Suggestions for Successful Retirement Planning
Although many people believe that financial planning is an exact science, the market meltdown of 2008 proved that idea untrue. When it comes to retirement, many people have been led to believe that saving is also an exact science. With so many retirement calculators online, people feel that deciding how much to save should be determined that way. However, these calculators are not able to assess each person’s complete situation. For example, two retired couples with the same income and debt amounts may differ greatly. One of the individuals may have a rare health condition requiring treatments that are not fully paid for by HealthCare insurance.
It is not completely accurate to use an online calculator’s suggestions. Nobody can predict the uncertainties of the future. Fortunately, there are other options. One of the best solutions is to buy insurance against uncertainty. To determine what is best, individuals must decide if they want to live it up now or be conservative to ensure income indefinitely. For instance, some people who plan to live until the age of 80 may actually live to be 105. People who pass their life expectancy may not know what to do for money. To successfully plan for retirement, take a deeper look at some of the common questions used by a life insurance calculator.
How Long Will You Live?
Life span is the biggest uncertainty in retirement planning. If people knew their exact date of death, financial planning would be a breeze. However, there is one beneficial product that assures income regardless of lifespan. It is called an immediate annuity, and it is available from life insurance companies. Keep in mind that immediate annuities are different from deferred annuities. Another benefit about these products is that they are very affordable. There are also some drawbacks. The most significant detriment is that the money invested cannot be passed to heirs. Once the money has been paid, it cannot be refunded to the contributor. This means it is best to avoid using a complete retirement nest egg for an immediate annuity. Most financial planners suggest putting between 25 percent and 50 percent into annuities. As a rule, put enough into an annuity to cover fixed monthly expenses.
How Much Will Investments Earn?
Unfortunate investments during the decade of 2000 to 2009 proved that unpredictable markets can affect retirement planning significantly. When this question is faced on a retirement calculator, one solution is to enter very low returns. Some planners do not ask about long-term returns on investments. In place of personal data, they use a special formula based on past market performance. However, the best way to stay on track is to monitor the plan regularly and make adjustments.
How Much Income Is Required?
This is a difficult question to answer. Research shows that the average couple will need more than $230,000 by retirement age to cover their out-of-pocket medical costs. However, not all people fit into the average category. Individuals who choose what amounts to save and when to retire will be able to manage the cost of retirement better. Saving now will always bring more money at retirement age. Financial planners recommend saving at least 15 percent of individual salary for a good safety margin. Developing a habit of modest spending now will likely carry over into retirement, which is an added benefit. People can also choose when they retire. Starting retirement at a later age creates a powerful and beneficial change in the overall arithmetic. It allows savings to accumulate more, which may make up for any losses. It also lowers the number of years an individual must live off savings. To learn about more options and issues, discuss them with an agent.
Down Payment Loan Options From 401 (k)s & IRAs
When it is time to make a down payment on a home, many people wonder whether it is best to withdraw money from a Roth IRA, a traditional IRA or a 401(k) plan. The best option is to withdraw from a 401(k). As a rule, people are allowed to take up to half of the full balance. However, that amount cannot exceed $50,000. The rule applies for people of any age, and there is no tax penalty. The interest paid on the loan goes back into the account.
Individuals who take out loans with 401(k) plans must repay the funds within five years. However, employers may allow members to take up to 15 years to repay the funds if the money is used to purchase a home. Employers deduct the monthly loan payments directly from a paycheck. Unfortunately, there is one drawback to taking money out of a 401(k). If the individual leaves that job, he or she must repay the funds within 60 to 90 days. Loans that remain unpaid after this period are considered distributions, which are subject to a 10 percent withdrawal penalty and taxes. The withdrawal penalty applies to individuals under the age of 55.
For individuals who do not have a 401(k) to take money from, a withdrawal from a Roth IRA is the smartest choice. Although it is not possible to borrow money and return it to the account, individuals may withdraw any amount up to their contribution limit without any tax penalties. There are no age restrictions for this rule. People under the age of 59½ who withdraw money from a Roth IRA must pay a penalty fee and taxes. If the funds are used to purchase a first home, individuals are allowed to withdraw up to $10,000 without paying these penalties. However, the funds must be repaid within five years to avoid a future tax penalty.
The least advantageous option for first-time home buyers is withdrawing money from a traditional IRA. Individuals may take up to $10,000 from these products without paying the 10 percent withdrawal penalty. However, the withdrawal amount is taxable for a traditional IRA. Although it is not necessary to be a first-time home buyer to qualify for these benefits, borrowers must not have purchased a home within the past two years. For more information about IRA and 401(k) loans, discuss the options with an agent.