401(k)s for the Self-Employed – Wall Street Journal – 08/11/12




The Wall Street Journal

Conquering Retirement – August 11, 2012

401(k)s for the Self-Employed

By Ellen E. Schultz

More older people than ever are working for themselves these days, according to the Bureau of Labor Statistics, and self-employment rises steadily with age. The group with the most self-employed? Men 55 to 64 years old.

That means they have to take the initiative to save for their retirement—and that is far trickier than simply signing up for a company 401(k) plan.

Individual 401(k)s. These are the most flexible option and let you make the largest contributions, or “deferrals.”

SEP-IRAs. Simplified employee pensions are often called SEP-IRAs, because your contributions go into an IRA. You can contribute up to 25% of your net self-employment income, up to a maximum of $50,000 in 2012. Contributions are deductible as a business expense.

Comments August 11, 2012

With an Individual 401(k) you can contribute on a pre-tax and/or post-tax basis.  Work with your Financial Adviser to design a 401(k) plan with a post-tax Roth election.  Withdrawals of post-tax Roth contributions, their gains, their interest and their dividends are free from income taxes.

Plans with a post-tax Roth election allow you to contribute up to $17,000 per year (if under age 50) or up to $22,500 per year (if age 50 or over) in any combination of pre-tax and/or post-tax dollars.  Although contributions on a post-tax basis to the Roth portion of the plan forgo the immediate tax benefit that pre-tax contributions gain, they are a hedge against anticipated higher income tax rates on withdrawals in future years.  Employer contributions to a 401(k) are on a pre-tax basis and are subject to income taxes upon withdrawal.

With a SEP-IRA you can only contribute on a pre-tax basis.  The same way pre-tax contributions to a 401(k) by an employee and/or employer are subject to income taxes upon withdrawal, SEP-IRA contributions are subject to income taxes upon withdrawal.

Aaron Skloff, AIF, CFA, MBA
CEO – Skloff Financial Group

Aaron Skloff, Accredited Investment Fiduciary (AIF), Chartered Financial Analyst (CFA), Master of Business Administration (MBA), is the Chief Executive Officer of Skloff Financial Group, a Registered Investment Advisory firm. The firm specializes in financial planning and investment management services for high net worth individuals and benefits for small to middle sized companies.  He can be contacted at www.skloff.com or 908-464-3060.

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