Individual 401ks Among 'Hottest' Retirement Plans for Self-Employed
COLUMBIA, MD, May 17, 2005 -- Self-employed or small business owners with no employees other than their spouse have a new incentive to set up a retirement plan and increase their retirement savings through an Individual 401k, according to Fiducial, a multidisciplinary professional services provider to small businesses with offices nationwide.
Any business that employs only the owner and his/her spouse is a candidate for the plan -- including C corporations, S corporations, single member LLCs, partnerships and sole proprietorships. They are eligible to contribute more to a 401k plan than to any other kind of defined-contribution retirement arrangement, depending on their earnings.
"The hottest thing for self-employed individuals or a very small company's business owner and spouse is the Individual 401k," said Wm. Leon Carter, a registered investment advisor for Fiducial in Stark, OR. "They are fairly new products and give the participants the ability to make loans on contributions to a 401k unlike regular retirement plans such as a Simplified Employee Pension Plan (SEP)."
The difference, noted Carter, is that "you can't take loans out of the other plans." Individual 401k plans give the small business owners the flexibility of a large company because there are more investment options available than most retirement plans.
Under the Individual 401k plan, individuals can put 20% of their net earnings into the fund after self-employment deduction up to a maximum of $41,000 plus elective deferrals of $14,000 for those under age 50 and $18,000 for those over age 50.
"They may want to retire sooner after they have established an Individual 401k which gives them the ability to save a lot of money in a short amount of time," Carter said.
Also figuring prominently on the financial services radar screen these days are Equity Indexed Annuities and Exchange Traded Funds. As a 10-year veteran of the industry, Carter believes Equity Indexed Annuities (EIAs) should figure prominently into a 401k plan since they provide a guarantee that you won't lose any of your principal.
"There's a huge demand for these because they give you a guaranteed return even if the market goes down while at the same time giving the owner higher returns if the general markets are going up," he said.
Instead of going through a traditional mutual funds provider or brokerage firm, the insurance company is the custodian of the EIA funds.
A number of clients are also asking Carter about Exchange Traded Funds (ETFs) that work similarly to a mutual fund but there's a key difference. Unlike mutual funds, ETFs trade the same way as stock so there's ability to trade intraday without having to wait for the market to close to determine what price you're going to get.
"I'm in the process of converting my clients from mutual funds to ETF funds because the expense ratios run much lower that mutual funds do," he said. "Investing in these funds makes it as tax efficient as possible because they have a lower turnover than most actively managed mutual funds and when investors sell their shares they are selling them through an exchange and not a mutual funds manager."
The first step in ensuring a good fit between a business and its retirement program is having a financial professional analyze its needs from several different perspectives since there are as many plan choices as there are investment vehicles.
"It's really important to talk to a financial advisor since financial services are so heavily regulated and it's so hard to understand," Carter said.
Still, there's a misconception among some business owners that they can't afford to set up a retirement plan. But that's not the case for most 401ks. It's not as costly as people think -- $750 to set up a plan and about $50 per employee per year to maintain and the return on their investment is very high.
One owner didn't realize the benefits of having a retirement account until Carter showed him the benefit on an Individual 401k for 2004 when he put close to $26,000 into his plan.
About Fiducial
Fiducial is an international provider of professional business and financial services to small businesses and individuals. Established in Europe in 1970, Fiducial entered the U.S. market in 1999 through a series of strategic acquisitions and now serves clients nationwide through a network of more than 500 company-owned and franchise offices. Privately held with global revenues of more than $1.2 billion, the company is the thirteenth largest accounting firm in the world and the twenty-fifth largest in the country.
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