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The Reasons for a Roth Solo 401(k)

September 22nd, 2015 | No Comments | Posted in Financial News

Here is a way for a solopreneur to save much more for retirement.

shutterstock_286872272Self-employed? Seeking to ramp up your retirement savings? You should look at the potential of the Roth Solo 401(k). If you are a high-earning solopreneur, this savings vehicle may be a great choice, because it allows you to make both employee and employer contributions to a 401(k) account in the same year.1

How does a Roth Solo 401(k) work? This is a Roth variation of the standard Solo 401(k). In the standard or “traditional” Solo 401(k), employer and employee account contributions are made with pre-tax dollars. In the Roth version, the employer still contributes pre-tax dollars but the employee contribution is made with after-tax dollars.2

There is a very nice tradeoff for doing this. If you abide by IRS rules, the Roth contributions you make, and the earnings they generate, can be eventually be withdrawn tax-free.2,4

You can make an employee contribution of up to $18,000 to a Roth Solo 401(k) in 2015. This amount will rise in future years, as it is indexed for inflation. Yearly catch-up contributions of up to $6,000 are currently allowed for those 50 and over.1

Your business may also contribute 20-25% of your yearly net earnings to the plan. If you have incorporated your company, this profit-sharing contribution limit is set at 25%; if you have not, the limit is 20%. Total employer & employee contributions to a Roth Solo 401(k) are capped at $53,000 for 2015, $59,000 if you are old enough to make the $6,000 catch-up contribution. (The maximum amount of employee elective deferrals and employer non-elective contributions should be calculated via the methods detailed in IRS Publication 560.)1,3

How can you invest the Solo Roth 401(k) assets? You can invest them in myriad ways. This is truly a self-directed retirement plan, and that means you aren’t limited to a dozen or two dozen investment options as you might be with a 401(k) sponsored by a large employer.4

What are the restrictions on a Roth Solo 401(k)? As the name implies, this is truly a retirement plan for the smallest businesses. To have any kind of Solo 401(k), you must work for yourself and have a maximum of only one other full-time employee (and that other FTE needs to be your spouse). If you foresee hiring people as your business evolves, then this is not the retirement account for you.1

Once the Roth Solo 401(k) contains more than $250,000 in assets at the end of a year, you must file Form 5500 annually with the IRS. The plan is also subject to non-discrimination testing if you have common-law employees. (If you have an employee and you can control what will be done by that worker and how it will be done, that is a common-law employee under the IRS definition.)1,5

If by chance you also contribute to a 401(k) at another employer, your total Roth and traditional employee contributions to all 401(k)s will be capped at the common employee limit – $18,000 in 2015, $24,000 if you are 50 or older. Participation in another 401(k) plan does not limit employer profit-sharing contributions to a Roth Solo 401(k).2

As you can’t deduct after-tax dollars, you can’t deduct your employee contributions to a Roth Solo 401(k). Your business, however, can still make traditional, tax-deductible contributions.2

December 31 is the annual deadline. If you want to contribute to a Solo 401(k) for the current tax year, you must create the account by that date or earlier. Many self-employed people need to establish a retirement plan, and through a Solo Roth 401(k), you could go a long way toward fixing a retirement savings shortfall.6

This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note – investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

Citations.
1 – irs.gov/Retirement-Plans/One-Participant-401%28k%29-Plans [6/18/15]
2 – kiplinger.com/article/retirement/T001-C001-S003-self-employed-tax-free-retirement-roth-solo-401-k.html [7/24/15]
3 – forbes.com/sites/ashleaebeling/2013/11/01/retirement-savings-for-the-self-employed/ [11/1/13]
4 – nerdwallet.com/blog/finance/advisorvoices/self-directed-retirement-plan-can-be-for-anyone/ [7/27/15]
5 – irs.gov/Businesses/Small-Businesses-&-Self-Employed/Employee-Common-Law-Employee [6/30/15]
6 – quickbooks.intuit.com/r/healthcare-and-benefits/solo-401k-savings-small-business-owners [6/30/15]

Can an IRA Be a College Savings Vehicle?

September 22nd, 2015 | No Comments | Posted in Financial News

You might be surprised at its potential.

shutterstock_307807664An IRA is a retirement savings account, right? Indeed it is. IRA stands for Individual Retirement Arrangement. Even with that definition, however, there is no prohibition on using an IRA to save for other purposes, such as funding a college education.

Why would anyone choose an IRA as a college savings vehicle? At first glance it may seem strange, since there are a couple of types of investment accounts dedicated to that goal in the first place. On closer inspection, IRAs – especially Roth IRAs – present some features that may be quite attractive to the parent or grandparent seeking ways to build education savings.

Flexibility. Parents are urged to save for their children’s college educations as soon as possible … but what if their children end up spending little or no time in college? Some young adults do start careers or businesses without any college education. Some simply have no interest in going to school any longer. Another, more pleasant circumstance worth mentioning: what if a child ends up getting a significant college scholarship, even a full ride?

In the event that these things happen, parents or grandparents who long ago opened a conventional college savings account may face a financial dilemma. Withdrawals from these conventional college savings plans are tax-free as long as they are used for qualified educational expenses, but if the funds are withdrawn other purposes, the distribution is regarded as fully taxable income (and the account gains are subject to a 10% penalty). Sometimes you can transfer assets in one of these conventional college plans to another family member, but some families do not have that choice.1

As an IRA can be used to build retirement savings as well as a college fund, it offers a family flexibility in the face of such uncertainty. If the assets saved and invested for college end up being nice but not really necessary, those invested assets can serve as retirement funds.

Tax-deferred growth & the possibility of a tax-free withdrawal. You probably know the basic distinction between a traditional IRA and a Roth IRA: the former permits tax-deductible contributions as a tradeoff for eventual taxable withdrawals, while the latter offers no tax deduction on contributions in exchange for tax-free withdrawals later (provided an investor follows IRS rules). Either IRA gives you tax-deferred growth of the invested assets.2

Now, can you open a Roth IRA, own it for five years or more and withdraw its assets tax-free even if you use the money for something other than your retirement? If that something is your child’s college education, the answer is (a qualified) yes.3

Withdrawals from Roth (and for that matter, traditional) IRAs face no withdrawal penalties if the money withdrawn is used for qualified educational expenses. Does this mean you can take $100K out of a Roth IRA today and use it to pay for your child’s college education? Probably not that large an amount, as some restrictions apply.3

Roth IRA withdrawals are regarded by the IRS as a return of contribution first, with account earnings coming out next. If you own a Roth IRA and are younger than 59½, or are older than 59½ but have owned your Roth IRA for less than five years, your Roth IRA’s earnings are ordinary, taxable income if withdrawn. Roth IRA contributions may be withdrawn tax-free at any age. So if you have contributed, say, $45,000 to a Roth IRA, as much as $45,000 from that Roth could be taken out tax-free and used for qualified educational expenses.3

One other note about taxes that pertains to all this: eight states offer no tax deduction on funds contributed to a conventional college savings plan. If you live in one of those eight states (Massachusetts, New Jersey, and California among them), then idea of withdrawing Roth IRA contributions tax-free at some point for education purposes may seem more attractive.3

Not considered an asset on the FAFSA. When students apply for college aid, they routinely fill out the Free Application for Federal Student Aid (FAFSA), which helps the federal government figure out the Expected Family Contribution (EFC), or the degree of college costs the family finances can handle. Conventional college savings accounts are counted as assets on the FAFSA in determining the EFC, but IRAs and other retirement accounts are not.1

What are the shortcomings of building college savings with an IRA? First, this idea may not work for retirees, as you must have “taxable compensation” to make Roth IRA contributions and you cannot make traditional IRA contributions past age 70½. Phase-outs on for high earners may reduce or even prohibit annual Roth IRA contributions for some. Lastly, some of the conventional college savings vehicles have no annual contribution limits, while the annual contribution limit for Roth and traditional IRAs is currently set at $5,500 ($6,500 if catch-up contributions are included). Even so, families who seek more flexibility in their college savings options may see an IRA, particularly a Roth IRA, as an intriguing potential college savings vehicle.2,3

This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note – investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

Citations.
1 – marketwatch.com/story/3-reasons-to-use-a-roth-ira-to-save-for-college-2015-03-25 [3/25/15]
2 – irs.gov/Retirement-Plans/Traditional-and-Roth-IRAs [3/18/15]
3 – cnbc.com/2014/02/03/roth-iras-can-be-a-better-way-to-save-pay-for-higher-education-costs.html [2/3/14]

The Long Ascent of the S&P 500

September 22nd, 2015 | No Comments | Posted in Financial News

The index has overcome obstacle after obstacle through the years.

shutterstock_93231562No one knows what will happen tomorrow on Wall Street. Even the most esteemed analysts can only make educated guesses. As the old saying goes: past performance is not indicative of future results.

All that said, the market has had many more positive years than negative years. The history of the S&P 500 is worth considering in light of recent market volatility. The S&P is the broad benchmark that economists, journalists, and investors regard as shorthand for the “market.” As the S&P 500 includes about 500 companies, it represents overall market performance better than the 30-component Dow Jones Industrial Average.

If you look at the annual returns of the S&P since 1928, you will see a long ascent with periodic interruptions, and a historical affirmation of equity investment. Looking at the total returns of the S&P (with dividends reinvested), the numbers are even more impressive.

The S&P advanced in 63 of the 87 years from 1928-2014. The average total return during those 63 profitable years was 21.5%. The average total return during the 24 down years was not as bad: -13.6%.1

The index has endured only four multi-year slumps in this 87-year period: 1930-31, 1940-41, 1973-74 and 2000-02. As for extremes, the total return for 1954 was 52.56%; the total return for 1931 was -43.84%.2

Narrowing the time frame a bit to reflect the investing experience of baby boomers, the S&P advanced in 31 of the 40 years from 1975-2014.3

Have market gains typically outpaced inflation? Looking at data since 1950, the answer is yes. Only in the 1970s and 2000s did U.S. equities climb less than consumer prices. The nadir came in the 1970s, when yearly inflation averaged 7.4% while the S&P’s average price return was 1.6% and its average total return was 5.8%. Contrast that with the 1990s. In that decade, the annual price return for the index averaged 15.3%, the average total return 18.1%; mean yearly inflation was just 2.9%.4

When it seemed like the market was coming apart, the S&P recovered. As the oil crisis and inflation threatened to unglue venerable economies in the 1970s, the S&P posted total returns of -14.31% in 1973 and -25.90% in 1974. Then it roared back, gaining 37.00% in 1975 and 23.83% in 1976. When the dot-com bubble burst, the total return was -11.85% in 2001, -21.97% in 2002; after that, the S&P’s next two annual total returns were +28.36% and +10.74%. When the credit crunch and the Great Recession occurred, the index delivered an abysmal -36.55% total return in 2008; the next year, the total return improved to +25.94% and stayed positive through 2014.2

The S&P’s compound returns are especially encouraging. In studying the index’s compound annual returns, we get a solid understanding of how staying in the market has benefited the U.S. equity investor. Average returns are interesting, yet they do not factor in cumulative gains or losses over a given period.

Examining 40-year performance periods for the S&P from 1928-2014, the poorest such period had a compound return of 8.9%. The best 40-year “window” had a 12.5% compound return. Using an even narrower “window,” we find that the best 15-year stretch was from 1985-99, producing a compound return of 18.3%. The poorest 15-year stretch occurred before many of today’s investors were born: the interval from 1929-43 had a compound annual growth rate of just 0.6%.1

The compound return across 1928-2014 is 9.8%, in simplest terms meaning that a $100 investment in shares of S&P 500 firms in that year would have grown to $346,261 in 2014.1

The correction we have just witnessed looks momentary indeed in the light cast by these “windows” of time.

The lesson? Stay patient & keep the big picture in mind. Before this latest correction, the market had been comparatively calm for so long (the previous 10% drop happened nearly four years ago), investors had almost forgotten what a correction felt like. Moreover, that 2011 correction was the culmination of a three-month market descent; it was not so abrupt.5

We cannot predict tomorrow, but we can take comfort (and encouragement) from the history of the market and how well the S&P 500 has performed over time.

This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note – investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

Citations.
1 – marketwatch.com/story/understanding-performance-the-sp-500-in-2015-02-18 [2/18/15]
2 – pages.stern.nyu.edu/~adamodar/New_Home_Page/datafile/histretSP.html [1/5/15]
3 – 1stock1.com/1stock1_141.htm [8/27/15]
4 – simplestockinvesting.com/SP500-historical-real-total-returns.htm [8/27/15]
5 – cnbc.com/2015/08/21/the-associated-press-qa-what-a-stock-market-correction-means-to-you.html [8/21/15]

Lifelong Money Management Tips

September 22nd, 2015 | No Comments | Posted in Financial News

shutterstock_132318593It’s never too late to get your financial records organized. Here are some tips to help you sort through all the records.

Keep a home file to maximize the efficiency of your financial records. Items should include:

  • Information on credit cards, debit cards, checking accounts, savings accounts, and copies of contracts
  • Copies of insurance policies
  • Information on home mortgages, land, and other property
  • Information on motor vehicles and driver’s licenses
  • Copies of birth, marriage, death, divorce, and citizenship papers
  • Copy of will, last instructions, and safe deposit box keys
  • Tax records for the last six years
  • Records of pension plans, education, health records, and employment
  • Current household inventory. List everything you own, how much it costs, and approximately how old it is. Add pictures of room/major items and keep receipts
  • Copies of all warranties and guarantees

Keep a safe deposit box for financial records that are difficult, costly, or impossible to replace. Items should include:

  • Birth, death, marriage, divorce, adoption, and citizenship papers
  • Deeds to property
  • Titles to motor vehicles
  • Stock and bond certificates
  • U.S. savings bonds
  • Important contracts
  • Military discharge and veteran papers
  • Patents and copyrights
  • Important disks or CDs
  • Negatives or the actual pictures of your home inventory

September, 2015 – Monthly Economic Update

September 22nd, 2015 | No Comments | Posted in Monthly Economic Update

Weekly Economic Update

Millennials aren’t saving a dime

September 22nd, 2015 | No Comments | Posted in Financial News

Cash-strapped millennials are slipping into the red.

People younger than 35 are not saving money, according to a study by Moody’s Analytics. In fact, their savings rate has dipped to negative 2%, meaning that they’re spending more than they have. They’re the only age group that has a negative savings rate.

In contrast, workers between the ages of 35 and 44 have a positive savings rate of about 3%.

Millennials are struggling in spite of an improving job market, with an unemployment rate that dipped to 5.8% in October as the U.S. economy added 214,000 jobs.

But wages have remained stagnant, barely budging since the 1990s. So even with a low unemployment rate, millennials are having a tough time making ends meet. Many have taken on hefty student debt to attain the skills they need to be competitive in the work force.

Things were a lot worse just a few years ago. Millennials had a negative savings rate from 2004 to 2009, bottoming out in 2007 with a deficit of about 15%, according to Moody’s.

They recovered in 2009 and managed to stay above water until 2012, when they slipped back into the red.

Related: First-time homebuyers abandoning the housing market

Many college-educated millennials are able to find professional jobs, but they have limited upward mobility according to Babson College finance professor Dr. John Edmunds.

“The millennials are waiting for those above them to either retire or die,” he said. “But the baby boomers are not going to give it up that easily.”

Source: money.cnn.com

What Ikea Product Names REALLY Mean

September 22nd, 2015 | No Comments | Posted in Lifestyle

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Ikea product names can be a mouthful for the English-speaking set.

But as you may not have guessed while slowly losing your soul to aisles of cheap cutlery, there’s a method to the madness. Ikea products are named after all sorts of Scandinavian people, places and things, with a specialized system determining which types of products get which titles.

Sofas, chairs and tables, for example, use Swedish place names. Kitchen accessories are named for fish or mushroom species. The Dagstorp sofa shares its title with a Viking-age granite memorial in southern Sweden, Flavorwire points out. The Smörboll bedding set gets its name from a beautiful little flower native to cooler regions of the Northern Hemisphere.

And every Ikea product gets a name chosen with love and care.

“Typically, the name is hand-picked from an available database maintained by Ikea of Sweden,” Janice Simonsen, design spokeswoman for Ikea U.S., told The Huffington Post.  “But sometimes the designer or the product developer will come up with a new name.”

Simonsen disclosed the exact schema they use, in case you were wondering:

Beds, wardrobes and hall furniture: Norwegian place names

Sofas, armchairs, dining chairs and dining tables: Swedish place names

Bookcases: Professions, Scandinavian boy’s names

Desks, desk chairs and swivel chairs: Scandinavian boy’s names

Garden furniture: Scandinavian islands

Rugs: Danish place names

Lighting: Measurement units, seasons, months, days, shipping and nautical terms, Swedish place names

Fabrics and curtains: Scandinavian girls’ names

Children’s products: Mammals, birds and descriptive words

Kitchen accessories: Fishes, mushrooms and descriptive words

Boxes, wall decoration, pictures and frames, clocks: Swedish slang expressions, Swedish place names

Bowls, vases, candles, candle holders: Swedish place names, descriptive words, spices, herbs, fruits and berries

And if you don’t know what an Ikea product name means, just pun it out!

5 Insanely Beautiful US Cities in the Fall

September 22nd, 2015 | No Comments | Posted in Lifestyle

To do great leaf peeping, you don’t need a forest–or even a long drive in the car. A big city vacation in fall with the kids, in fact, gives you museums, festivals, hotels with indoor pools–and plenty of autumnal splendor.

Autumn is often a blissful time to do a city getaway anyway: summer tourists are gone, prices have often dipped, and some of a city’s best features–big parks, twinkling evening lights, and humming bakeries–come to life.

Here are five cities where you can enjoy both pastoral majesty and metropolitan convenience:

Boston

2015-09-18-1442616234-2885266-2.jpg
Fall folliage in Boston (Flickr: Chris Yiu)

The back-to-school energy in this big college town blends beautifully with the Massachusetts foliage–and the crowds of summer tourists are gone. The tree-lined Freedom Trail often gets dubbed the Foliage Trail this time of year, to accent the kid-friendly walk through Revolutionary history. For even more urban leaf-peeping, go to Harvard’s Arnold Arboretum, in Jamaica Plain, which does guided walks on Saturdays. During October, kids will love walking through historic Beacon Hill as much as the grown-ups: the elegant neighborhood is famous for its fabulous Halloween decorations. If you come for later fall visit, you can start ice skating on Frog Pond in tree-filled Boston Common by mid-November.

Good family-friendly hotel: Westin Hotel Waterfront Boston

Minneapolis/St. Paul

2015-09-18-1442616200-2476839-1.jpg
Saint Paul in the fall (Courtesy Visit Saint Paul)

During autumn, the Twin Cities get their last hurrah before the long winter sets in: Minneapolis alone claims to have a park every six blocks, and the trails and lakes are lined with ash, elm and boxelder trees. For the best close-up views, pick up bicycles at rental shops like FreeWheel Bike or Wheel Fun and do a stretch of the almost 40 miles of the Grand Rounds National Scenic Byway, which includes the Minneapolis Chain of Lakes, Minnehaha River and Minnehaha Falls. The flour mill-based city also has a long tradition of excellent bakeries, which seem to beckon even more come fall: check out the Salty Tart, famous for its macaroons.

Good family-friendly hotel: The Best Western Normandy Inn & Suites, near the Mill City Museum

Portland, Ore.

2015-09-18-1442617127-464462-3.jpg
Autumn in Portland, OR (Flickr: Jeff Gunn)

This Pacific Northwest city was founded on logging (hence the nickname Stumptown, which now graces the favorite local coffee), but plenty of trees remain to burst into color. The Hoyt Arboretum, outside downtown, has 6,000 trees representing over 2,000 species (63 of which are rare or endangered), and fall highlights include the sourwood (whose leaves can turn scarlet or maroon) and the Franklin (which can turn red, pink or orange, with white flowers). To mix foliage with waterfalls, drive east to the Columbia River Gorge and see the 620-foot-high Multnomah Falls, which gets framed gorgeously in foliage during autumn (mid- to late October is the peak for colors around here). Back in the city, sweet tooths will find another magical display of color at VooDoo Doughnuts, where the namesake VooDoo Doll doughnut is Halloween-friendly with raspberry filling and a pretzel stake through the heart.

Great family-friendly hotel: Modera Hotel Portland, near the World Forestry Center Discovery Museum in Washington Park

Providence, RI

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Burnside Park in Providence, RI (Flickr: Josh McGinn)

Like Boston, Providence offers a mix of urbane delights and New England-style, leaf-peeping brilliance, especially around Brown University, in Prospect Terrace Park, or in downtown’s Waterplace Park. Providence adds another unique flair during fall: the flames of WaterFire, the evening displays of 100 bonfires that line downtown’s three rivers, and which light up completely on select Saturday nights this fall (Sept. 26, Oct. 3 and Nov. 7). For more nature ablaze, Providence offers a huge display of jack o’ lanterns–5,000 of them, including intricate works of pumpkin art– in Roger Williams Park Zoo from Oct. 1 to Nov. 1.

Great family-friendly hotel: Christopher Dodge House, near Waterplace Park

Santa Fe

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Santa Fe in the fall (Courtesy Visit Santa Fe, New Mexico)

The aspens that surround the New Mexico capital, in the Sangre Cristo Mountains, turn a brilliant gold come fall, and any drive into town is enhanced by the smell of harvest-season chiles, roasting at roadside stands. For a fun ride near the foliage, you can take the ski lift up the mountain at the Santa Fe Ski basin on select days in September and October; slopeside festivities also include corn hole games, treasure hunts and live music. In October, you can check out the Albuquerque International Balloon Festival in nearby Albuquerque. The city is also home to a year-round kid-pleaser: the Harrell House Bug Museum and Science Shop, which has 2,400 mounted insects and more than 100 live animal exhibits

Good family-friendly hotel: Encantado Resort, in the foothills of the Sangre Cristo Mountains

Source: huffingtonpost.com

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