It’s not what you have – it’s what you do with it. Understanding the rules of various retirement plans is the first step. Utilizing the Power of Self-Directed IRAs is the key that will take your investments to the next level.
That said, Scott T. Hanson has a point, in a recent editorial he penned for CNBC: It’s Time to Level the Retirement Playing Field.
In his piece, Hanson argues that in addition to an income divide that seems to divide the haves from the have-nots, we also have a significant problem with retirement plan inequality. Usually, we hear this line of thinking regarding the divide between workers with access to generous defined benefit pensions (now largely confined to government workers and a few old-line unions) and those without, who have to make do with defined benefit 401(k), 403(b) and other plans.
Hanson takes a different position: That now, many workers do not even have access to a defined contribution plan. Meanwhile, those in 401(k) plans are able to set aside up to $17,500 per year ($23,000 for those ages 50 and over) on a tax-advantaged basis. That amount is even higher when you consider the effect of employer matching contributions.
Meanwhile, other employees – those without access to an employer plan for whatever reason, have to make do with the meager contribution limits of IRAs – just $5,500 per individual, plus another $1,000 for those over 50. Because these are frequently lower income individuals, part-timers, or independent contractors on the fringes of the economy, they not only start out at a significant disadvantage not just in terms of income, but also in terms of what they are even allowed to save in a retirement plan.
For example, an employee with no access to a 401(k) making 35,000 can save the maximum in an IRA, but he or she will never be able to match the retirement savings of an employee making a salary of $45,000 and contributing the maximum into his 401(k), who can also fund a traditional or Roth IRA if they are frugal enough. Even discounting the effect of employee contributions, the higher earning worker also has a benefit enshrined in tax law, while the other employee, no matter how diligent, is locked out of the same option.
Hanson argues that we should have the same tax-deductible limits for all employees. That we should not favor the large company employee with a 401(k) over the small company employee whose employer cannot provide the same benefit for whatever reason.
I believe there’s a lot of merit to Hanson’s argument. However, we must deal with tax law as it is, not as we would like it to be. If you want to maximize the amount of income you can save on a tax-advantaged basis, then you have to take certain steps. Here are some ideas for those not covered by 401(k)s, or for small business owners:
- Arrange your affairs to maximize income as an independent contractor rather than as an employee. This allows you to declare income as Schedule C income and allows you to deduct expenses directly against income (otherwise you have to deal with the 2 percent threshold for unreimbursed employee expenses). But you also get to defer up to 25 percent of your income in a SEP plan, or a similar amount in a self-directed 401(k).
- Start a solo 401(k) plan. You may have heard that it takes a ton in administrative expenses, actuarial costs and long-term obligations to start a pension plan. But if you are a sole practitioner, or you work as part of a spousal team, you will find that you can start up an individual 401(k) plan for much less than you may have anticipated.
- Use a spousal IRA. Are you married? You can contribute to a spousal IRA, even if your spouse does not have earned income. This can effectively double your allowable IRA contributions to $11,000 per year provided you otherwise qualify and meet income limits.
- Maximize the return you get on available retirement assets. This is where the power of Self-Directed IRAs comes in. Do you have a particular expertise in real estate? Precious metals? Venture capital/private equity? Tax liens and certificates? All these are allowable retirement plan investments. But you have to use a Self-Directed IRA, which means you must use an administrator or custodian for your funds who is familiar with the unique rules and the power of Self-Directed IRAs.
And that’s where we come in. American IRA, LLC is among America’s leading self-directed retirement investing companies. We can help you arrange your retirement savings strategy to maximize the amount of money growing tax deferred or in some cases (using Roth IRAs and Roth accounts within 401(s), tax free.
For a free guide to self-directed retirement investing or to see what we can do for you, please call us today at 866-7500-IRA(472), or visit us online at www.americanira.com.
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