The amount of assets needed to sustain cash flow, as well as, where and how it is
invested must be carefully considered when planning for financial independence and retirement.
People with a plan tend to be more confident that they will be comfortable throughout retirement.
Saving and investing to provide for the future may be in the form of pre-tax payroll deductions
that grow tax-deferred, or after-tax contributions to tax-deferred or tax-free vehicles, or
contributions to a taxable account, or any combination of all of these vehicles.
A few of the main types of plans are described below:
After -tax contributions to a Traditional IRA or Roth IRA are always a good idea. Of
course, you must have earned income, and you may contribute any amount of savings up to the
maximum which is $5,500 (< 50 years old) or $6,500 (> 50 years old).
With a Traditional IRA , a person may or may not be able to take a tax deduction. It all
depends on tax status, earned income and if a person participates in a company plan. In any case,
it is a great way to accumulate assets for retirement, and your contributions may be self-directed
into a variety of investments, such as mutual funds.
With a Roth IRA , a person does not receive a tax deduction for the contribution. Assets in
a Roth IRA grow free from taxation, however there are income eligibility phaseouts. If you
cannot do a deductible Traditional IRA, and if your income is under the phase out amounts, then
you most certainly should consider a Roth IRA. Roth IRAs are not subject to the Required
Minimum Distribution (RMD) rules at age 70.5; whereas, a RMD must be taken from a
Traditional IRA plan.
When a person leaves a job or retires, the company retirement plan may be rolled to a
Rollover IRA which is a Traditional IRA. Assets may be invested and are self-directed versus
having the limited choices of the company plan. In some cases, it may make sense to leave assets
in the company plan when investment choices are very good.
A SEP-IRA contribution is made with after-tax income and assets grow on a tax-deferred
basis. Contributions cannot exceed the lesser of 25 percent of compensation (20 percent for
self-employed before the self-employment tax deduction), or $55,000 for 2018.
There is a special rule to calculate contributions if you are a sole proprietor, partner in a
partnership or LLC. If you have interest in this type of plan, meet with a CPA to assist in
calculating your contribution limits and the contribution limits for employees, if applicable.
Assets may be self-directed and invested into any traditional investments, such as mutual funds.
A Simple IRA is a good plan for a small business owner and self-employed persons with
100 or fewer employees. Contributions are made on a pre-tax basis and grow tax-deferred.
Administrators must make matching contributions if the business owner has employees. The
match must be dollar-for-dollar up to three percent of the employee’s salary, or a flat two percent
for eligible employees. Contributions for administrator participants are limited to $12,500 in
2018. However, there is a catch-up of $3,000 for persons age 50 and older. Once again, assets
may be self-directed and invested into any traditional investments, such as mutual funds.
A 401(k) Plan is generally offered by larger companies and participants contribute on a
pre-tax basis up to $18,500 in 2018 with a catch-up of $6,000 for persons over 50 years old. My
experience is that some people refuse to save into a plan if their company does not match. If you
feel this way, do yourself the biggest favor and save anyway. The pre-tax contribution offers a
current tax savings, and your assets will grow on a tax-deferred basis which is very powerful.
A 403(b) Plan is similar to a 401(k), but it is offered through a 501(c)(3) tax-exempt
entity. Many hospital plans and schools, for example, offer a tax-sheltered plan or 403(b).
A Profit Sharing Plan is sometimes offered in place of a 401(k) or in combination with a
401(k). A profit sharing plan gives an employee a share in company profits. Employer
contributions are tax-deductible, and assets in the plan grow on a tax-deferred basis for
employees. A company may contribute up to 25 percent of an employee’s salary or $55,000 this
year, whichever is less.
In my opinion, many employers could do themselves and their employees the biggest
favor by using a well-know, low cost provider or discount broker with transparent costs rather
than plans where the fees tend to be hidden saving their companies thousands of dollars each
year that can be invested back into their businesses. In addition, employers may want to consider
offering employee financial planning to assist employees with participation in plans and to help
In my experience, assisting people in addressing retirement goals for a long time; my best
advice is save as much as possible, as early as possible, and it is never too late to begin saving
even if it is not a maximum contribution. Most people should consider saving in a company plan,
if available, as well as an IRA plan and a taxable account. Building assets in a taxable account
can provide a source of assets for future cash flow to meet a gap between a retirement date and
the onset of social security or it can provide cash flow while allowing tax-deferred assets to
continue to grow until 70.5 years old.
For specific advice to meet your needs, seek a qualified professional advisor.