Don’t Miss Out on Retirement Plans When Self-Employed

 

Jane Young, CFP, EA

Jane Young, CFP, EA

Just because you are self-employed doesn’t mean you don’t have access to tax advantaged retirement plans.   There are several options that may work for you depending on your situation.  One option is to contribute to a traditional IRA or Roth IRA.   In 2013, you can contribute up to $5,500 of earned income into an IRA ($6500, if you are over 49).  However, you may be restricted due to income limitations.  In addition to an IRA, consider establishing a SEP (Simplified Employee Pension), a SIMPLE IRA (Savings Incentive Match Plan for Employees) or a Solo 401k.

A SEP is a plan that enables you, as the employer, to set aside money for yourself and your employees.  The entire contribution is made by the employer, and equal contributions must be made to all eligible employees – including you as the owner.  The annual contribution is flexible, which allows you to adjust the contribution based on profitability for the year.  In 2013, contributions cannot exceed the lesser of 25% of W2 earnings or $51,000.  The limits are the same but some special rules apply, if you are self-employed. A SEP has low start-up and administrative costs with no filing requirements.  SEP plans can be of most benefit to companies with few or no employees, since the entire contribution is made by the employer. 

If you have several employees, a SIMPLE IRA plan may be the best option.  Employers are required to make a matching contribution of up to 3% or a 2% non-elective contribution for each eligible employee.  In 2013, employees may elect to contribute up to $12,000 plus a $2,500 catch-up if they are over 49.  A Simple IRA is available to any employer with up to 100 employees.  It is easy to establish and inexpensive to operate.  Discrimination testing is not required and there are no filing requirements.   A Simple IRA plan can be more practical than a SEP for companies with a lot of employees because most of the contribution is usually made by the employee.

Another option is a solo 401k. A one-participant 401k plan is a traditional 401k that covers a business owner with no employees, or a business owner and his or her spouse.  A solo 401k generally has the same rules as a traditional 401k plan.  As a business owner, you play the role of the employer and employee.  As an employee, in 2013 you can contribute up to $17,500 ($23,000 if you are over 49) – up to 100% of your compensation.  As an employer, you can contribute up to 25% of compensation.  Total contributions, not including catch-up provisions, cannot exceed $51,000.  If you hire employees who meet eligibility requirements, they must be included in the plan and their elective deferrals may be subject to non-discrimination testing.   Additionally, if your solo 401k plan has more than $250,000 in assets, you must file an annual report.

Save Money by Focusing on Problem Areas

office pictures may 2012 002Probably the most important step toward saving money is making the decision to focus on your spending habits.  We frequently over spend when we are in a hurry and don’t have time to plan.  If you are serious about saving money slow down, get organized and devote some time to making a plan.   You can save a tremendous amount of money if you think about what you really need, make a list, compare prices and avoid impulse purchases. 

Start by reviewing your spending habits over the last year.  Calculate what you have been spending in relation to your income.  You may discover a gap in what you thought you were spending and the amount of money left at the end of the month.  It may be helpful to keep a spending diary for about a month to see where all that money is going.  Review your spending over the past year for obvious problem areas.  It is common for many people over spend on eating out, clothing, electronic toys and tools.

You may be very good at setting a budget and tracking your expenses. However, if this approach is too time consuming for your busy lifestyle, consider what we call creative budgeting.  Focus on one or two problem areas and develop creative ways to reduce spending in these areas.  For example, if you have a tendency to over spend on eating out, think of some creative ways to reduce spending in this area.   Some creative ideas may include preparing breakfast and lunch at home the night before and taking it to work with you.  When you are preparing a meal, make extra to freeze or eat for lunch the next day.  If you enjoy going out with friends, consider eating something before you leave and then eat something small like a side salad or cup of soup when you meet your friends.  Instead of going to expensive restaurants, organize a potluck dinner or start a gourmet club and rotate going to one another’s home.   Restaurants generally provide very large portions.  Consider taking half of your meal home, to be eaten later, or share a meal with a friend.  You can also save money by meeting at someone’s home for appetizers, desert or drinks before or after dinner.  There are many ways to reduce money on eating out that may result in more enjoyment, better food and less calories.

 Continue working on fun and creative ways to reduce spending in your initial target area.  The key is to substitute what you are giving up with something equally or more satisfying and less expensive.  Once you feel comfortable with your level of spending in this area, identify another place where your spending could be reduced.  After going through this process a few times you should become more focused on where you are spending money and your spending should be better aligned with your goal

European Travel Can Be Affordable, With Some Planning

Jane Young, CFP, EA

Jane Young, CFP, EA

The cost of a European vacation may seem daunting. However, with some careful planning you can travel to Europe for little more than the cost of a domestic vacation. Two major factors in saving money on European travel are when and where to go. Several countries, such as Romania, Slovakia, Hungary, Portugal, Greece, Spain and Poland can be considerably less expensive than others. If you are trying to save money, avoid Norway, Sweden, Switzerland, Finland, Denmark and Luxemburg. Consider avoiding the big touristy cities such as London, Paris, Amsterdam, Geneva, Rome and Venice until you have more money to spend.
You can reap tremendous savings by avoiding travel during the peak summer season. Airfares and lodging prices are generally very expensive between mid-May and mid-September. You can find great deals on airfare and lodging between October and April. You can also save money by flying on a Tuesday or Wednesday.
Additionally, you can save money by flying across the Atlantic into less popular European cities. Once you arrive in Europe, you can take a train or a discount European airline to your target destination. It is also easier to use frequent flyer miles for flights to less popular destinations. Frequent flyer miles can be a great way to save money on air travel.
Once in Europe, it is inexpensive to get around using trains, buses, subways and discount airlines. If you have a long distance to travel, consider a sleeping train or a discount airline such as easyJet or RyanAir. You will be pleasantly surprised by how inexpensive airfare within Europe can be. A sleeper car enables you to cover large distances while you sleep and save the cost of a hotel for the night. There are places that you just can’t reach by train or bus. In this instance, rent a car for a day or two to visit these special out of the way places.
Save money on lodging by staying at an apartment, Bed and Breakfast or locally owned hotel. You can get better deals by staying in small towns or just outside the city center; this works well in cities with a good subway system. There are numerous resources on the internet to research and read reviews on lodging options. Some of my favorite on-line resources include TripAdvisor, VRBO (Vacation Rental by Owner), Fodor’s and Rick Steve’s.
Finally, don’t pay unnecessary fees to convert money or to pay for travel expenses. Many credit cards charge between 1-3% on European purchases. Use a credit card, such as Capital One, that doesn’t charge extra fees for European purchases. Generally, you can get the best exchange rate on local currency by using your ATM card at a major European bank. With ATMs, you are charged a fee every time you pull out money, so minimize your transactions. Avoid Change Bureaus; they usually have unfavorable exchange rates.

10 Financial Planning Tips to Start 2012

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Jane M. Young, CFP, EA

 

1. Dream – Take a few minutes to look at the big picture and think about what you want from life. How do you want to live, what do you want to do and how do you want to spend your time. Successful businesses have vision statements and strategic plans. Create your own personal vision statement and strategic plan.

2. Set Goals – What are your goals for the coming year? Start by brainstorming – fill a page by listing all the goals that come to mind. Think about different facets of your life such as family, career, education, finance, health and so forth. Review your list and prioritize three or four goals to focus on in the coming year.

3. Evaluate Your Current Situation – What did you spend and what did you earn last year? What was necessary and what was discretionary? Did you spend in a purposeful manner and do your expenses support your goals and strategic plan. How much did you save or invest in a retirement plan? Can you increase this in 2012? If you are like most of us, a category is needed for “I have no clue”.

4. Track Spending and Address Problem Areas – If you aren’t sure where you spent all that discretionary cash, track your expenses for a month or two. It can be very enlightening – Yikes! Identify a few problem areas where you can cut spending and really place some focus. Identify the actions you will take to cut spending in these areas. Set weekly limits and come up with creative alternatives to save you money.

5. Evaluate Your Career – Are you doing what you really want? Are you being paid what you are worth? Have you become too comfortable that you are settling for safe and familiar? Could you earn more or work in a more rewarding position if you took the time to look? Are you current in your field or do you need to take some refresher courses? Do you know what it will take to get a promotion or a better job? In this volatile job market you need to keep your skills current, to nurture your network and to maintain a current resume.

6. Maintain an Emergency Fund – Start or maintain an emergency fund equal to at least four months of expenses, including the current month. This should be completely liquid in a checking, savings or money market account.

7. Pay Off Debt – Establish a plan to pay off all of your credit card debt. Once this is paid off establish a plan to start paying off personal debt and student loans.

8. Save 10-15% of your income (take advantage of employee Benefits) – You need to save at least 10-15% of your income to provide a buffer against tough financial times and to invest for retirement. At a very minimum, you need to contribute up to the amount your employer will match. Additionally, be sure to take advantage of flex benefits or employee stock purchase plans that may be offered by your employer.

9. Maintain a Well Diversified Portfolio – Maintain a well-diversified portfolio that provides you with the best return for your risk tolerance, your investment goals and your investment time horizon. Be sure to re-balance your portfolio on an annual basis. Avoid over reacting to short term swings in the market with money that is invested for the long term.

10. Don’t Pay Too Much Income Tax – Avoid paying too much income tax. Get organized and keep good records to be sure you are maximizing your deductions. Make tax wise investment decisions, harvest tax losses and maximize the use of tax deferred investment vehicles. Donate unwanted items to charity – be sure to document your donations with a receipt.

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