Kyle's Monthly Newsletter - October 2024

Hello everyone,

Hope you all had a good September.

In the December 2023 Newsletter I encouraged you to review your personal finances using my "Key Principles of Personal Finance", which I'll include again:?

Key Principles of Personal Finance:

1. Tracking your expenses and having a spending plan
2. Emergency funds and contingency planning
3. Managing debt
4. Saving and investing
5. Tax planning
6. Retirement planning
7. Risk mitigation, asset protection, and insurance
8. Estate planning

Last month we discussed #5 Tax planning. This month we're going to talk about #6 Retirement planning.

Retirement planning is a vast topic that could be its own series. Retirement planning involves:

• projecting income in retirement, such as Social Security, portfolio, pensions, annuities, etc.
• projecting and estimating spending in your retirement years
• designing an investment strategy to meet your goals and income needs in retirement
• planning for health care needs in retirement, and
• navigating the emotional transition from your working years to your retirement years.

Because many of you are self-employed, in this month's newsletter I am going to focus on the three most common retirement plans I recommend for self-employed clients.

When I say "self-employed" in this context I am referring to both small business owners and independent contractors.

If you are a business owner or contractor who provides services to other businesses, then you are likely considered self-employed. This includes any professionals that receive nonemployee compensation for good or services they provide and file self-employment income on their tax returns.

If you are unsure if you qualify as being self-employed it is best to speak with a professional to confirm.

Also, for this list, my goal is not to cover every detail of each one of these retirement plans. I am going to cover a few key features of each, why I recommend these plans, and who I typically recommend them for. This is not intended to be a comprehensive list or financial advice for any particular situation. It is to familiarize you with different options available. If you are interested in establishing any retirement plan for yourself, I recommend you speak with a professional to fully understand the requirements and nuances involved with establishing a retirement plan for your particular situation.

Alright, with that being said, let's jump in. Here are...

The three most common retirement plans I recommend for self-employed professionals

Starting with, the Simplified Employee Pension plan, also known as the SEP IRA.

SEP IRAs

SEP IRAs are retirement plans that can be established by both business owners with employees and solo-professionals.

A key feature of SEP IRAs are that only employers can make contributions to SEP IRAs, they do not allow for employee contributions.

Also employer contributions are based on a percentage of income and must be equally proportionate for all employees, including the business owner(s).

The employer is not required to make a contribution every year, however, if they want to make a contribution for themselves, they must also make a contribution for all eligible employees.

For that reason, they are great for either solo-professionals or business owners with a spouse as the only other owner/employee.

However, they are not the best option on this list for employers with non-spouse employees that would like to contribute at a higher percent of their income than they are willing to also contribute for every employee (more on this later).

There are two main reasons I recommend SEP IRAs:

1. They are relatively simple to establish and maintain.
2. You can establish and contribute to a SEP IRA up to the filing date for that year's taxes.

Let me elaborate on point #2. Here is a hypothetical situation to explain what I am talking about.

Imagine it is the end of February 2025 and you are meeting with your accountant to discuss filing your tax return for the year 2024. 2024 was a great year for business and you are looking for ways to reduce your taxable income for that year. Even though you are in the calendar year 2025, you can still open a SEP IRA and make contributions for the tax year 2024 up to the date in which you file your 2024 taxes.

Because of this feature, I have used this technique to help business owners establish a SEP IRA and make contributions before their tax filing date to get the one-two punch of reducing their taxable income and getting more of their hard earned money in a tax advantaged retirement account to build their retirement savings.

For that reason, a SEP IRA could be a good option for solo-professionals, or business owners that work with their spouse only, and are looking for a relatively simple solution to establishing a retirement plan.

However, for solo-professionals looking to maximize how much they can contribute, or for business owners with employees, there may be better options on this list.

which brings us to the next retirement plan I'll discuss...

SIMPLE IRA Plans

Savings Incentive Match Plan for Employees, also known as the SIMPLE IRA, are another type of retirement plan available for small business owners.

I like SIMPLE IRAs because, like SEP IRAs, they are relatively simple (no pun intended) to establish and maintain.

One difference of SIMPLE IRAs, which make them a common recommendation for business owners with employees who are not yet ready to commit to establishing a 401(k) plan, is that they allow for both employee contributions AND employer contributions.

SIMPLE IRAs allow employees, including the business owner, to make employee contributions up to a limit. For the year 2024 that limit is $16,000 or $19,500 if you are age 50 and older.

The business owner also has options to choose from regarding employer contributions. The business owner may choose from these two options:

• a dollar-for-dollar match of what the employee contributes up to 3% of pay, or
• a nonelective flat 2% of pay regardless of whether employees make contributions or not

While they do require that the business owner choose from one of the above options every year, the benefit is that the business owner is able to contribute higher amount via the employee contribution feature without having to make an equally proportionate contribution to every employee's account, they only need to satisfy the above requirements.

For that reason, I think they are a better option for business owners with employees than SEP IRAs.

And finally, in my opinion the most underrated option on this list...

One-participant 401(k) Plans

One-participant 401(k) plans, also referred to as Solo 401(k) plans, are like a traditional 401(k) but are designed specifically for self-employed professionals with no employees other than themselves or their spouse.

These plans have more filing and maintenance requirements than SEP IRAs and SIMPLE IRAs, however, because they are designed for single participants (spouses being the exception) they have less filing requirements than a traditional 401(k) plan.

The big benefit to one-participant 401(k) plans is the ability to contribute a higher amount with the same amount of income than SEP IRAs and SIMPLE IRAs.

The reason being the business owner is able to make both employee contributions AND employer contributions to the one-participant 401(k).

Employees participating in 401(k) plans, including one-participant plans, are able to make employee contributions up to a higher limit than with a SIMPLE IRA. For the year 2024, that limit is $23,000, or $30,500 for participants age 50 and older.

Additionally, they are allowed to make employer contributions based on a percentage of their self-employment income.

The ability to make contributions as both the employer and the employee make one-participant plans the secret weapon for self-employed professionals who want to maximize their potential retirement savings and tax planning.

Deciding which is best for you

As I mentioned before, this was not intended to be a comprehensive list of all retirement plans available for small business owners.

It was to discuss some of the key features of the options I most often recommend for clients.

If you are interested in implementing one of these, or any other, retirement plans for yourself, I recommend speaking with a professional who can help you analyze your particular situation and guide you in choosing the best plan for you.

I hope you found this list insightful.

Have a great month,

Kyle

Disclosures

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Quote of the Month

Tips to Take Home

Ignoring the Bumps

Investing in the stock market can feel like a bumpy road. This year alone the U.S. stock market experienced multiple 5% pullbacks. Wes Crill, Senior Investment Director and Vice President at Dimensional Fund Advisors shared this about the bumpiness of stock investing and keeping a long-term mindset.??

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“The US stock market had two declines this year that startled many investors. One was just over a month ago, when stocks fell about 8.5% from July 17 through August 5. I had actually forgotten about the other one back in April, when stocks dropped 5.7% from April 1 through April 19. Maybe I’m wired to ignore anything that begins on April Fools’ Day.?

What may have gotten lost in focusing on the declines is how well the US market has performed for the overall year. Through the end of August, the Russell 3000 Index was up 17.1%. That’s substantially higher than the index’s average calendar-year return of 13.2% from 1979 to 2023.?

There’s an important message here about not overreacting during a downturn—it could be a momentary blip in an otherwise upward climb for the markets. In fact, the Russell 3000 had an intrayear [sic] decline of at least 10% in 25 out of 45 years since 1979. In 17 of those 25, the index ended up for the year!”?

• Wes Crill, PhD. Senior Investment Director and Vice President. Dimensional Fund Advisors.?

Disclosures

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