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Individual 401(k) or SEP IRA

Written by Becky Botzet on .

Selecting the right retirement plan as a self-employed person (or a married couple as business owners) can be confusing and differences between options can sometimes be overlooked.

The SEP IRA and Individual 401(k) are the two most common retirement plans chosen by successful self-employed individuals due to their high contribution limits and flexible annual contributions. However, there are key differences that should be considered.

The Individual 401(k) and the SEP IRA have comparable maximum limits. Due to the way the contribution is calculated, a self-employed individual may be able to contribute more into an Individual 401(k) versus a SEP IRA at the same income level; therefore, maximizing retirement contributions and valuable tax deductions.

Here's how the calculation works. In 2018, participants in an Individual 401(k) can contribute up to 100% of the first $18,500 ($24,500 if age 50 or older) of W-2 compensation or net self-employment income for a sole proprietorship. In addition, a profit sharing contribution can be made up to 25% of W-2 wages or 20% of net self-employment income. The contribution limit calculation in an Individual 401(k) is important because it allows you to potentially save more than a SEP IRA at the same income level. The maximum is $55,000 ($61,000 if age 50 or older due to a "catch-up" provision.)

The SEP IRA allows self-employed individuals to contribute up to 25% of their W-2 earnings or 20% of net self-employment income up to the SEP IRA contribution limit. The maximum is $55,000 for 2018.

You should also consider whether you want the option of borrowing against your retirement plan by using your retirement plan's balance as collateral. IRS rules do not permit a loan in a SEP IRA, but an Individual 401(k) loan of up to half of the plan's value up to a $50,000 maximum is allowed.

Finally, Individual 401(k) balances do not count towards your IRA balances when you are making Roth Conversions, whereas SEP IRAs do. You are allowed to make non-deductible IRA contributions each year ($5,500 in 2018, plus $1,000 catch up if age 50 or older). If you do not have a balance in an IRA, you are able to convert the contribution tax free to a Roth IRA. Individual 401(k) plans work well with this back-door Roth strategy.

Although Individual 401(k) accounts have greater administrative responsibilities than a SEP, in many cases if you are self-employed and do not plan on adding employees, the Individual 401(k) is a much better option than the SEP IRA.


Have You Saved Enough to Retire?

Written by Bruce Primeau on .

I recently read an article entitled, "U.S. Workers Still Lag In Retirement Savings, But Execs See Hope," in Financial Advisor Magazine and I want to share some of the points they provided. According to an Insured Retirement Institute study of 806 people between the ages of 55 and 71:

  • 42% of those surveyed have no retirement savings
  • Of those that have some retirement savings, 38% have less than $100,000 saved
  • Only 38% of those surveyed have even calculated what they will need to retire
  • Less than 20% of those surveyed feel very confident that they can retire securely while 30% say they are not at all confident they can ever retire
  • According to Tim Seifert, Vice President and head of annuity sales at Lincoln Financial Group, 75% of people who turn age 65 this year will be alive at age 90 and nearly 50% will be alive at age 95

The above statistics are very concerning to me since most people are not saving adequately for what could be a 30+ year retirement time horizon. This also explains why many people reaching age 65 are continuing to work, at least part-time, simply because they cannot afford to retire. While I realize the title of the article finishes with "Execs See Hope," I guess I am not seeing where that hope may be coming from. The statistics outlined above clearly paint a dim picture and, in many cases, may mean that many of the children of those baby boomers may become financially responsible for their parents.

I guess the one statistic that stands out most to me is that only 38% of those surveyed have even calculated what it will take for them to retire. That means that 62% are either "winging it" or are just planning to work for the foreseeable future – neither of which is a good solution.
If you find some of the statistics outlined above concerning, or you or someone you know is part of the 62% "winging it," feel free to reach out or pass along our contact information.

Bruce Primeau – This email address is being protected from spambots. You need JavaScript enabled to view it. 612-987-9112
Becky Botzet – This email address is being protected from spambots. You need JavaScript enabled to view it. 763-639-3425
Jon Govin – This email address is being protected from spambots. You need JavaScript enabled to view it. 763-355-5873


Long-Term Care Insurance—Not for the Faint of Heart

Written by Becky Botzet, CFP®, EA on .

According to the U.S. Department of Health, 70% of people 65 and older will need some kind of long-term care eventually. It is also reported that although nearly one-third of today’s 65 year olds may not ever require long-term care or assisted living, one out five (20%) will need it for more than five years. The costs vary depending on the degree of care, see below for the median costs.

The average length of a nursing home stay is between 2½ to 3 years. Diagnosis of Alzheimer’s Disease could result in a much longer stay. You should also know that Medicare does not cover nursing home care except for limited stays after a hospital admission of three days or more, nor does Medicare pay for in-home care if it’s not skilled nursing care.

The question is: Can you afford your own long-term care if the situation rises or should you consider long-term care insurance? The decision to purchase long-term care insurance is very specific to your own situation.

As a general rule, we don’t typically recommend you insure the full amount of your anticipated cost. Consider that in a nursing home you will not have the other normal day-to-day expenses that we typically include in your retirement projections, such as vehicle expenses, travel and food. You will continue to receive Social Security and pension benefits to help cover costs.

The cost of long-term care insurance varies greatly. Even with the same exact situation, the cost you could get quoted with one insurance carrier can be significantly higher than another. As we recommend as with all types of insurance, work with an independent agent who specializes in long-term care and can shop many insurance companies for your best fit.

The American Association for Long-Term Care Insurance recommends the ideal age to look into long-term health care insurance is between the ages of 52-64. As with most insurance policies, there are many variations of coverage, such as individual or shared policies, daily benefit amounts, inflation riders, and varying maximum lifetime benefits. These factors, along with your current health and health history, will all determine the cost.

Long-term care insurance premiums range in the thousands per year, so it’s important to weigh the cost to the benefit and the risk. As mentioned above, every person’s situation is different so it’s important to consider your options and the impact of your financial plan.


Market Volatility Rises Again

Written by Matt Wright on .

Most global stock markets had been on a rather astonishing run of low volatility since February 2016. Gains from stocks during this period were not unusually high for a bull market, they were just unusually steady and price dips were infrequent, small, and brief.

We advised in our year-end commentary just a few weeks back: "Please don't count on a repeat this year." Lo and behold, volatility among stock and bond markets around the world have spiked higher in the past 10 days. Our cautionary comments were not intended to be clairvoyant – we did not have any specific prediction of what the financial markets would do. We just know from history that calm markets can break without advance notice and for reasons that may not be obvious.

So what do we know about the recent action in the markets? The primary issue appears to be what is often called a "growth scare." As opposed to a recession, a growth scare is a concern that investors have when there is potential for the economy to become overheated, resulting in higher inflation. This causes interest rates to rise and bond prices fall, which then feeds into competing investments such as stocks, causing them to fall as well.

While the overall growth rate of the U.S. economy remains historically below average, the proximate cause of the growth scare is the very low level of U.S. unemployment. The job market has tightened considerably in recent years but is just now pointing towards the possibility of rapidly accelerating wages. While your first thought might be that rising wages sounds like a good thing, it certainly can raise the risk of inflation, which is a potential problem in the long run.

What is SWA doing about this market volatility? We're not actually doing anything different than we were before. Our primary stance is to make sure our clients were invested in a risk-appropriate strategy beforehand since we know that markets can't be timed. In addition, we use portfolio monitoring software that allows us to review client allocations on a daily basis and rebalance them when they have drifted far from their target weightings. In recent months, we trimmed stock exposure in many of our client accounts due to the healthy gains we'd seen up until the end of January. Maintaining the target allocation on an ongoing basis helps to reduce downside when the risk inevitably shows up.

And speaking of risk, our view is much more focused on avoiding permanent losses than intermittent ones than can be recovered. Because of that, our investment choices could be accused of being too boring at times. We aim for what we consider to be reliable long-term growth vehicles and stay away from unproven and/or speculative opportunities that may be highly rewarding but come with excessive risk. For example, a hot strategy in recent years of buying "short volatility" products has cratered in the past week. One product that had phenomenal returns as recently as last month had a breathtaking drop of over 95% in a single day. Investors (gamblers) who had made "easy" money in the past learned that it was a little harder than they thought. SWA does not believe a little extra upside is a good trade for a whole bunch of downside.


Congratulations to Minnesota!

Written by Jon Govin on .

According to Kiplinger's magazine, Minnesota is ranked FIRST...as the least tax friendly state for retirees. Unfortunately, first is not a good thing in this case! To be clear, when we are talking tax, we aren't limiting this to income tax. Retiree tax friendly considerations include: Income tax, sales tax, inheritance tax and property tax.

As those who live here know, taxes can be quite steep, even prior to retirement. Individual state income taxes start at 5.35% and rather quickly move up to 9.85%. Average state and local sales taxes are 7.27% (although, food, clothing, and prescription and nonprescription drugs are exempt from state sales tax). Social Security income is currently taxed in Minnesota—one of 13 states who tax this. Recent state tax legislation exempts a portion of Social Security income (Kiplinger's did not pick this up).

Other income that Minnesota taxes, that many states don't, includes: Pensions, distributions from individual retirement accounts and 401(k) plans. And, topping it off, Minnesota is one of 14 states with an estate tax (6 states have inheritance taxes). Property taxes are high but compared to our neighbors to the east (Wisconsin), not too bad, especially when considering state property tax refunds based on income.

Just for the record, rounding out the top 10 least tax friendly states for retirees on Kiplinger list: Connecticut, Kansas, Vermont, Nebraska, New Mexico, Utah, Maryland, Indiana, and drumroll please..., Wisconsin. So, if you are looking to make a short move east across the border to ease the tax burden, think again.

But wait, before you reserve your U-Haul trailer to push off to a more friendly tax state, consider a few things. Don't let the "tax tail wag the dog." The choice to live in one state versus another, especially in retirement years, has a lot to do with other factors. Factors beyond tax that rank pretty high include: Healthcare availability, cost of living, climate, social interaction and basic quality of life. Again, remember that the rankings are in regard to taxation for retirees, specifically tax factors for retirement income (pensions, Social Security, retirement account distributions, etc.) And folks who just look at income taxes may be surprised when they see a very steep property tax bill or find that food and day-to-day spending jumps due to high sales taxes (see below for a sample list of "taxes").

As many of you look toward retirement, you may be looking at places you may want to snowbird to or permanently move. In a future blog, we will look at states that may be a bit more appealing, from a tax standpoint. The top choice may surprise you.

We are curious to hear your thoughts on what you think is appealing when considering relocating, snowbirding, or just getting away for an extended stay.

Taxes that are state (or local jurisdiction) specific may include:
Income Tax
Property Tax
Auto Tabs
Gas Tax
Sales Tax
Local Add-On Sales Tax
Luxury Tax (interesting note - MN taxes more for champagne than other fermented "wines")
Sin Tax (liquor and cigarettes)
Mansion tax (NY only, for homes in excess of $1 million)
Travel Tax (e.g. hotel / resort / airline ticket)
Estate Tax

North Metro: 763.355.5873
227 East River Parkway
Champlin, MN 55316-5873

South Metro: 612.987.9112
5871 Crossandra Street SE
Prior Lake, MN 55372-3337

West Metro: 763.639.3425
322 Greenhill Lane
Long Lake, MN 55356

This email address is being protected from spambots. You need JavaScript enabled to view it.