If you peruse financial periodicals, you will often come across
information having to do with various types of retirement
plans.
If you peruse financial periodicals, you will often come across information having to do with various types of retirement plans. Having been a professional for 17 years now, I will humbly admit that I have grown weary of looking at IRA, Roth IRA, SEP IRA literature. Not that it is unimportant information; to the contrary. However, putting myself in the place of the normal reader, it sometimes seems as though one is as good as another. It bores me.
But wait a minute! There is a “new and improved” retirement plan – the “Individual” 401K. Let me explain.
First, it is important to understand the 401(k). With a 401(k), employees of companies can put away pre-tax money (from their paycheck before taxes are removed). The employee in most cases has several mutual funds and possibly even individual stocks to choose from At Enron, many of the employees chose the stock for a large majority of their 401(k) holdings. Therefore, when Enron stock sank, so did their 401(k) balances.
As a time-tested, proven armchair quarterback, I can accurately say that it would have been beneficial for those people to diversify by using some of the mutual fund choices rather than having so much money in the company’s stock. Other 401(k) characteristics are that normally the employee can borrow up to 50 percent of the balance and the potential gains are tax-deferred. Of course, when the money is withdrawn completely from the account, taxes and possibly even penalties may apply.
With IRAs, Roth IRAs, SIMPLE IRAs and SEP IRAs, there are many of the same traits. The money grows non-taxable, there are normally a wide variety of investment choices, and sometimes contributions are tax-deductible.
But with the “Individual” 401(k) – remember, this is different than the traditional 401(k) – there are other important characteristics. For example, you can borrow against it. There are limits, and there may be advantages versus a SEP, a SIMPLE, a Roth or a Traditional IRA. Also, the contribution limits are higher than the alternatives. Furthermore, if you are over the age of 50, there are even greater contribution possibilities! You can have your cake and eat it, too!
This is for the small-business owner. Moreover, the proprietor that has little or no employees benefits most by using the Individual 401(k). If you have contributed to the SEP, SIMPLE, Roth or Traditional IRA for your business retirement plan, the Individual 401K may be a better alternative for you. It is important to learn about the various costs associated with these plans. Ask a qualified professional for help with answers to all pertinent questions. Distribution prior to age 59 1/2 may be subject to a 10 percent tax penalty.
Many professionals in the financial world do not yet know about the Individual 401(k). It was part of the Tax Relief Act of 2001. The Act also created the ability for city and county employees to roll over their retirement plans. These are the 457 Plans that many people thought were stuck in oblivion for years. Now, there are bigger and better things to do. The choices have grown for many people.
Plan soon, because Dec. 31 is the deadline for some retirement plan contributions. It is important to know all of your options before making a final decision. Take the time to gain the knowledge necessary to make the best decision for you. Since most of you self-employed people do not have a natural 401(k) established, it is imperative for you to find the best retirement plan that suits your particular situation.
Jeff Welch helps individuals and small businesses with long-term investment planning. He is a registered representative of, and securities are offered through, Financial Network Investment Corporation, member SIPC. His office is located at 339 Seventh St. in Hollister. Phone 630-1525.
