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Retirement Plans for Self-Employed

Retirement Plans for Self-Employed

Retirement Plans for Self-Employed

Tim Hayes AIF®, CRPS®, AWMA®, CFS®, APMA®, CAS®

Self-employment can be risky, but it can be made less so with good retirement-saving options. I want to give some love to two under-appreciated retirement plans: (1) the Simplified Employee Pension (SEP) and (2) the Solo 401(k)—available to anyone who generates income from self-employment.

Simplified Employee Pension (SEP)

SEPs are supercharged IRAs, following the same rules but allowing for higher contributions. In 2020, the self-employed can contribute the lesser of (a) $57,000 or (b) 20% of their net adjusted income (gross income from self-employment minus expenses and half of one’s self-employment tax).

SEPs are easy to set up and administer. You can download Form 5305-SEP from the IRS’s website, or you can get the form from your financial advisor. You do not even have to send the form back to the IRS—simply file it in your records. Most mutual fund companies, brokerage houses, and insurance companies offer prototype SEPs. You can invest your SEP in stocks, bonds, funds, CDs, etc.

You can also make contributions to your SEP until you file your taxes, including extensions. Therefore, someone eligible for an extension can open a SEP for 2019 upon filing tax returns in October 2020.

SEPs are also flexible. You can change the amount you invest in your SEP from year to year, and some years you can decide not to fund it at all. Contributions are 100% tax deductible; they grow tax-deferred. However, they are taken above the line and cannot be Schedule C deductions, which means you save on income taxes but not self-employment taxes.

Solo 401(k)

Self-employed individuals who want to save more than 20% on taxes should look into the Solo 401(k), which allows them to put in the 20% plus an additional $19,500 of employee contributions. Moreover, people aged 50 and over can add another $6,500. A spouse who draws a salary can also contribute.

People aged 50 and over with a net adjusted income of $100,000 can contribute $20,000 to a SEP. However, if they open a Solo 401(k), they could contribute the $20,000, plus the $19,500 of employee contribution, plus another $6,500 in age 50 catch-up, for a total of $49,000.

There is a limit, however. In 2020, that number is $57,000. However, catch-ups do not apply, so people aged 50 and over with enough income can contribute $63,500. One thing to keep in mind: the $57,000 is per employer, while the employee limit is per person.

If you have more than one job from which you contribute to a retirement plan, the most you can do in total is $19,500, and if you’re 50 or over, the $6,500 catch-up. You can add a Roth component to a Solo 401(k) so that some or all of the employee portion of your contribution ($18,000) can go into a Roth account.

A Solo 401(k) does require a little more paperwork than a SEP, and once the assets in the plan reach $250,000, you will have to file Form 5500 EZ with the government every year. However, Form 5500 EZ is only a two-page form.

The deadline for establishing a Solo 401(k) is December 31 of the year in which you would like to receive the tax deduction. However, you can fund the employer portion  (20% or less) until you file your taxes, including any extensions.

With the Solo 401k, you can also access money tax-free using a Solo 401(k) loan. You can borrow 50% of the total 401(k) value, up to a maximum of $50,000. IRS rules do not allow loans with a SEP IRA.

Notes

Independent Contractor, Sole Proprietor, LLC Taxes, Mike Piper CPA, Kindle Addition

Both examples assume no additional employees. If employees are part of the mix the rules get complicated.

These are the opinions of Tim Hayes and not necessarily those of Cambridge Investment Research. They are for informational purposes only, and should not be construed or acted upon as individualized investment advice.

About Financial Advisor Tim Hayes

Tim Hayes

Financial Advisor

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As an independent financial advisor, I have access to many financial products, including mutual funds, ETFs, stocks, bonds, and annuities. I use them to build custom portfolios, trusts, and retirement plans for people and organizations.

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Diversification and Investment Portfolio Design

Diversification and Investment Portfolio Design

Diversification and Investment Portfolio Design

Tim Hayes AIF®, CRPS®, AWMA®, CFS®, APMA®, CAS®

I hope everyone is healthy and has made it through this part of the virus unscathed. It has been a crazy six months for investors. In March, stocks were down by almost 40%. Since then, US stocks have recovered most of their losses.

Bonds, mainly US Treasuries, have done exceptionally well, benefiting from a fall in interest rates as investors rushed to safe investments.

Gold has hit an eight-year high of $1,779 as speculators have poured into what they hope will provide some protection if the virus causes significant economic dislocations.

To keep the recession from falling into a depression, the Treasury and the Federal Reserve instituted enormous programs. So far, they have helped the stock market recover faster than anyone could have imagined and kept us out of a depression.

However, these programs have caused the deficit to balloon to $3.7 trillion and the Federal Reserve’s balance sheet to top $7 trillion.

It is not clear if the Treasury or the Federal Reserve would have the stomach to drastically increase these programs if the economy faced a significant setback.

Surprisingly, even after all this, the stock market is expensive; we usually do not begin an economic recovery with stock prices close to all-time highs. But this is not a typical recession. Conversely, bonds are a less appealing investment with interest rates dropping.

The one somewhat attractive market is foreign stocks. They have underperformed U.S. stocks for over a decade and have recovered less quickly. If you own some and are frustrated by their underperformance, it might behoove you to keep them. If you do not own any, it may make sense to allocate a slice of your U.S. portfolio to them.

Diversification remains investors’ one free lunch. This is a good time to double-check yours, especially if you were uncomfortable with March’s downturn.

*Diversification, rebalancing, and asset allocation strategies do not assure a profit or protect against loss. 

These are the opinions of Tim Hayes, and not necessarily those of Cambridge Investment Research. They are for informational purposes only, and should not be construed or acted on as individualized investment advice.

2020 Results as of 06-30-2020

Comparison of Returns of Different Asset Classes (Investors cannot directly invest in an index)
Asset Class2020 Results2019 Results
Barclays Global Aggregate Bond Index2.98%6.84%
S&P High Yield Corporate Index-3.72%14.47%
The Barclays Capital U.S. Treasury Inflation Protected Securities (TIPS)6.0%8.43%
Barclays Aggregate Bond Index6.3%8.72%
The MSCI Emerging Market Index-10.7317%
MSCI EAFE Index-12.5925%
S&P 500 Index-4.0%30.43

More About Tim

Expert and highly personalized financial planning, retirement planning, and independent investment solutions, when you need an independent financial advisor in Massachusetts — Boston and Greater Boston, Salem or the North Shore, Hingham, or another town on the South Shore, Andover and the Merrimack Valley, the Metrowest including Foxboro, or the Southcoast, Martha’s Vineyard, Nantucket, and Newport RI from my Dartmouth office.

About Financial Advisor Tim Hayes

Tim Hayes

Financial Advisor

CLICK TO CALL

No Cookie-Cutter Solutions

As an independent financial advisor, I have access to many financial products, including mutual funds, ETFs, stocks, bonds, and annuities. I use them to build custom portfolios, trusts, and retirement plans for people and organizations.

Fee-Only or Commission What Standard of Care is Best for You?

Buying Gold

Buying Gold

Buying Gold

Tim Hayes AIF®, CRPS®, AWMA®, CFS®, APMA®, CAS®

About a month ago, I received an email from a client asking how I felt about her 18-year-old nephew investing in gold. (I received permission from my client to discuss that email in this article.)

My first reaction was maybe her nephew was a fan of Ron Paul, for whenever I watch cable news I see a commercial where former Texas congressman and presidential candidate Ron Paul urges viewers to go to his website, where they can watch a video of Dr. Paul stewing over all the money-printing by the Federal Reserve and how it is allegedly going to fuel inflation and lead to a financial crisis worse than the Great Depression. The video ends with Dr. Paul recommending that viewers protect themselves by ordering from him a “blueprint plan,” a part of which urges investors to buy gold. (Gold has been one of his biggest beefs ever since President Nixon ended the U.S. dollar’s direct convertibility to gold in 1971—the “Nixon Shock” that jolted Paul into running for Congress.)

A couple of days after receiving my client’s email, I ran across a Bloomberg article scrutinizing the performance of a hedge fund run by legendary fund-manager David Einhorn. The reporter pinned the fund’s poor performance on its 10% allocation to gold, which has declined in value from $1,400 an ounce in 2014 to around $1,088 an ounce today—a 22% drop.

In his 2013 first-quarter letter, Einhorn wrote, “Investors are currently complacent about the unintended consequences of central bank money printing… Under the circumstances, it is curious that gold is not doing better.”[1]

The next day, I came across a Bloomberg article having to do with Bank of America yanking money from a poor-performing hedge fund run by John Paulson. Paulson had made billions betting against the subprime mortgage market, after which he made a bet on gold for the same reasons Einhorn did: money-printing by central banks, leading to inflation.[2]

By reversing how money gets into the economy Einhorn, Paulson, and especially Paul exaggerate the inflation risk. They all believe money enters the economy when the Federal Reserve prints money that they then give to the banks. However, for that money to actually get into the economy, a customer of banks must borrow, and that decision is independent of how much money is in the banking system.

Think of the last time you borrowed money. Did any of your concerns have to do with how much money was in the banking system? Of course not. Nor is it much of a concern for the banks. Moreover, after the bursting of the housing bubble, many customers are less inclined to borrow, no matter how much money the Fed gives to banks.

With most of the new money trapped in the banking system, and with inflation falling, their other theory that gold is still an inflation hedge remains untested. Under the gold standard the U.S. had in some form until 1971, owners of dollars could exchange them for a certain amount of gold. This convertibility forced governments and central banks to buy more gold, thus making that precious metal an antidote for money-printing and inflation.

Proponents of a return to the gold standard, such as Dr. Paul, worry that today’s dollars are fiat that is backed only by a government’s promise to pay. However, when the U.S. and Great Britain were on the gold standard, the amount of gold someone received in return for their dollars or pounds was an arbitrary number created by the government. So it, too, was just a promise to pay a certain quantity of gold.

Also, when gold was in coins, e.g., during the Roman Empire, financial experts such as David Graeber, in his book Debt: The First 5,000 Years,[3] as well as Geoffrey Ingham in his, The Nature of Money,[4] point out that the value of the coins was independent of their gold content and instead was based on a government’s promise to pay.

So why should anyone own gold when its connection to money is founded in part on folklore and a gold standard that no longer exists? Well, first of all, economics and finance are not physics—a lot of it is ruled by mythology, rules of thumb, and superstitions. And as long as investors, politicians and governments are influenced by these folktales (Russia’s central bank, for example, is buying gold) gold just might remain a hedge if inflation returns.

These are the opinions of Tim Hayes and not necessarily those of Cambridge Investment Research. They are for informational purposes only, and should not be construed or acted upon as individualized investment advice.

[1] Basak, Sonali, and Simone Foxman. “Einhorn Punished by Gold as Greenlight Re Drops 16% in 2015.” BloombergBusiness, July 28, 2015. http://www.bloomberg.com/news/articles/2015-07-28/einhorn-punished-by-gold-as-greenlight-re-tumbles-16-this-year

[2] Burton, Katherine, and Hugh Son. “Bank of America Pulling Clients’ Money From Paulson Fund.” BloombergBusiness, Aug. 5, 2015. http://www.bloomberg.com/news/articles/2015-08-05/bank-of-america-pulling-client-money-from-paulson-fund

[3] Graeber, David. Debt: The First 5,000 years. New York: Melville House, 2011.

[4] Ingham, Geoffrey. The Nature of Money. Cambridge, U.K., and Malden, Mass.: Polity Press, 2004.

More About Tim

Expert and highly personalized financial planning, retirement planning, and independent investment solutions, when you need an independent financial advisor in Massachusetts — Boston and Greater Boston, Salem or the North Shore, Hingham, or another town on the South Shore, Andover and the Merrimack Valley, the Metrowest including Foxboro, or the Southcoast, Martha’s Vineyard, Nantucket, and Newport RI from my Dartmouth office.

About Financial Advisor Tim Hayes

Tim Hayes

Financial Advisor

CLICK TO CALL

No Cookie-Cutter Solutions

As an independent financial advisor, I have access to many financial products, including mutual funds, ETFs, stocks, bonds, and annuities. I use them to build custom portfolios, trusts, and retirement plans for people and organizations.

Fee-Only or Commission What Standard of Care is Best for You?

Student Loans Private and Government Sponsored

Student Loans Private and Government Sponsored

Student Loans Private and Government Sponsored

Tim Hayes AIF®, CRPS®, AWMA®, CFS®, APMA®, CAS®

“In a perfect world, the government would allow borrowers to refinance their public and private student loans into one loan at a low rate while they continue to receive government protections and forgiveness programs. Until then, borrow wisely, and refinance cautiously.”

Harvard University recently invited Financial Advisor Tim Hayes to talk with students about their personal financial planning. During those meetings, Tim learned that students have both private and government-sponsored student loans.

He was not able to offer much help, as he did not know a lot about the student loan repayment process. So, he figured, if he were ever invited back, he had better read up on how this $1.23 trillion of student loans is going to get paid.

After researching the refinancing and repayment maze, Tim decided to use his experience with the Harvard students as the topic for his June article in SOCO and New England Monthly magazines.

Highlights of that article

Students have a combination of private and government loans. Only a private sector lender will allow a student to take advantage of today’s extremely low rates and refinance their private and public loans into a new loan.

However, if a student refinances their government loans, they lose protections that only a government loans have. Such as an option to limit their monthly payment to a % of their income; to stop payments if a financial hardship arrives. Moreover, the capacity to have a portion of their loan forgiven if they work in a particular job.

Additional Info

One intriguing and potentially problematic aspect of the private refi market that Tim was not able to fit into his article is that some of the biggest providers, such as So-Fi, are not banks.

That means unlike banks they can not create money. Yes, banks create money when they make a loan. Read Paul Sheard’s article on how banks create money. (Paul is the Chief Global Economist at Standard & Poors)

Because they cannot create money, non-banks need constant inflows of money from investors to lend to new borrowers. Plus, non-banks can not rely on the Federal Reserve as a lender of last resort. (As much as we bash the Fed if they did not act as the lender of last resort, we would have had a depression in 2008.)

So if there was to be another financial crisis like in 2008, where funding freezes up, a non-bank lender could find themselves in an awkward position. Unable to get money from investors or the Fed.

These are the opinions of Tim Hayes and not necessarily those of Cambridge Investment Research. They are for informational purposes only, and should not be construed or acted upon as individualized investment advice.

More About Tim

Expert and highly personalized financial planning, retirement planning, and independent investment solutions, when you need an independent financial advisor in Massachusetts — Boston and Greater Boston, Salem or the North Shore, Hingham, or another town on the South Shore, Andover and the Merrimack Valley, the Metrowest including Foxboro, or the Southcoast, Martha’s Vineyard, Nantucket, and Newport RI from my Dartmouth office.

About Financial Advisor Tim Hayes

Tim Hayes

Financial Advisor

CLICK TO CALL

No Cookie-Cutter Solutions

As an independent financial advisor, I have access to many financial products, including mutual funds, ETFs, stocks, bonds, and annuities. I use them to build custom portfolios, trusts, and retirement plans for people and organizations.

Fee-Only or Commission What Standard of Care is Best for You?

404(c) Retirement Plan Compliance

404(c) Retirement Plan Compliance

404(c) Retirement Plan Compliance

Tim Hayes AIF®, CRPS®, AWMA®, CFS®, APMA®, CAS®

Providing an independent voice and an objective opinion to your employees will fulfill your obligation better.

Section 404© of ERISA requires plan sponsors to provide specific information and education to their employees, and if a plan meets the requirement than the plan sponsor and other fiduciaries are not liable for losses in an employee account.

Partnering with a credentialed, experienced, and independent financial advisor can help fulfill your requirements. For example, Tim holds employee meetings on asset allocation; provides employees with risk tolerance questionnaires and asset allocation templates as well as detailed information from Morningstar and fi360 on the investment options available in your plan.

ERISA 404(c) Compliance Checklist – PDF 3 Pages

404(c) Services

If managed correctly 404(c) is a great program. It requires plan sponsors to provide accurate information and education to their employees. If a plan meets their requirements, the plan sponsor and fiduciaries can shift the responsibility for investment losses to the participants. In Tim’s experience, many companies assume they have 404(c) covered, and they are not in compliance.

  • For example, Tim holds employee meetings to help them understand asset allocation; he also provides employees with risk tolerance questionnaires as well as detailed information from Morningstar, as well as others, on the investment options available in your plan.
  • With that in mind, we would like to offer you a no obligation review of your ERISA policies to assure your company is in compliance.  In the end, you will either have an opinion that you are in compliance, or you may find there are areas to be worked on.

In Tim’s experience, many companies assume they have 404(c) covered, and they are not in compliance.

404© Can Be a Win/Win for Both You and Your Employees

You reduce liability and your employees receive the tools to make better decisions, but it is an ongoing commitment.

With the stock market close to all-time highs it’s a good time to discuss 404© and how Tim’s services could be of benefit.

These are the opinions of Tim Hayes and not necessarily those of Cambridge Investment Research. They are for informational purposes only, and should not be construed or acted upon as individualized investment advice

About Financial Advisor Tim Hayes

Tim Hayes

Financial Advisor

CLICK TO CALL

No Cookie-Cutter Solutions

As an independent financial advisor, I have access to many financial products, including mutual funds, ETFs, stocks, bonds, and annuities. I use them to build custom portfolios, trusts, and retirement plans for people and organizations.

Fee-Only or Commission What Standard of Care is Best for You?

If you’re concerned about your financial future, let’s talk