Are you self-employed and taking a salary in excess of $146,000? What if I told you it was possible to have $1,000,000 in just 10 years, only putting aside $60,500 per year, while also lowering your current taxes? It gets even better. If you use this strategy for 20 years, you’ll come out with $3.8 million, and if you give yourself 30 years the number becomes $10.9 (assumes 10% return).

While most people have heard of standard SEP and 401(k) plans, it turns out that certain tools exist that could more aggressively fund a retirement while still retaining the tax shelter benefits of these more traditional plans. The best part of this strategy, is you only have to put aside $60,500 per year, compounded annually, for this to work. That means if you take a salary of $146,000 (2018), you are left with $85,500 before taxes to live and spend however. – That’s not too shabby.

1 – 2 Person Business (no other employees)
SELF-EMPLOYED 401(K) STRATEGY

If you’re business is solely run by you, or you and your spouse, you have the ability to establish a Self-Employed 401(k). This is different than your run-of-the-mill Corporate 401(k). The Corporate 401(k) maximum contribution limits (for 2018) are capped at $18,500 (the maximum is $24,500 for those over 50). However, the Self-Employed 401(k) allows you to contribute up to a massive $55,000 per year ($61,500 for those over 50 – in 2018).

Much like when you contribute to the Corporate 401(k), the Self-Employed 401(k) is also tax deferred. So if you take a salary of $200,000 – instead of paying taxes on the entire $200,000 you made, you pay tax only on $145,000 ($200K – $55K). If you are in the top tax bracket this can be tax savings of $20,350 per year. Depending on additional household income and how you’re filing, this may lower your tax bracket.

The other important tactic to this strategy is opening and contributing to an IRA or Roth IRA. The IRA allows you to contribute up to $5,500 ($6,500 for those over 50) per year (2018). This $5,500 added with the $55,000 you put in your Self-Employed 401(k) equates to $60,500 in annual savings.

When considering the average annual return for the total stock market, we see that stocks have historically returned around 10% annually. Assuming that you max out your Self-Employed 401(k) and IRA contributions each year ($60,500 per year) – in 10 years with a 10% rate of return – your account will be worth $1,060,636. If you do this for 20 years, at a 10% rate of return, the plan produces $3,811,651 – 30 years and the account balance becomes a magnified $10,947,077.

3 + Person Business (with employees)

If you have employees other than a spouse, here are a couple different type of Retirement Accounts that can be set up. – The SEP IRA or the SIMPLE IRA.

SEP IRA STRATEGY

The SEP IRA, like the Solo 401(k), has a maximum contribution limit of $55,000 – but there is a catch. Unlike the Self-Employed 401(k), the SEP IRA mandates that the employer make equal contributions as a percent of salary (as much as 15-25%) for all employees that are:

• over 21 years old,
• work full time,
• and have worked for the company over 3 years.

This works extremely well for a family business, a newer business (under 3 years old if you wish to exclude non-shareholder employees) or an employer willing to add a little bit more for their employee’s retirement.

SIMPLE IRA STRATEGY

If you aren’t able or willing to contribute an equal percent of salary for all of your eligible employees’ retirement accounts, there is another option that still offers tax advantages and retirement savings. – The SIMPLE IRA.

The employer match limits on the SIMPLE are either 2% or 3% – much lower than the SEP’s 15-25%. The SIMPLE IRA requires the employer to make one of two kinds of contributions:

• Dollar-for-dollar matching contributions (not to exceed 3% of the employee’s compensation) on behalf of eligible employees who make elective-deferral contributions.
• A 2% non-elective contribution to all eligible employees, regardless of whether they make deferral contributions.

Unlike the SEP IRA which gives the employee money from the employer (even without the employee contributing), the SIMPLE IRA only requires the employer to offer the benefit. When the employer offers the 3% benefit, the employee must also be willing to put in their own money as well, at a minimum the 3% from their own paycheck (just like a typical 401(k) match). If the employer opts to offer the 2% non-elective contribution, then the employee doesn’t have to put any money in, but it does limit the amount the employer has to contribute to eligible employees.

Now, the caveat here is the maximum contribution limits for a SIMPLE IRA are much lower than the SEP IRA and Self-Employed 401(k). – The maximum contribution limits in 2018 for the SIMPLE IRA are $12,500 (15,500 for those over 50). Remember the 2018 Self-Employed 401(k) and SEP IRA maximum contribution limits are both $55,000 per year.

Back to the Strategy

SELF-EMPLOYED 401(K)

This works if you own a 1-2 person business with no employees (other than your spouse) and you take a salary of $193,045 or more. You must be willing to max out the contributions to the Self-Employed 401(k) and your IRA, which is a total of $60,500 per year. When contributing the $60,500, compounded annually, after 10 years with a 10% rate of return, you will have $1,060,636, after 20 years you will have $3,811,651, and after 30 years this becomes $10,947,077.

SEP IRA

Now with the SEP strategy, if you take a salary in excess of $220,000 this will work. Again, you would put aside $55,000 in your SEP and need to contribute the maximum amount to your IRA or Roth IRA ($5,500 for those under 50 – $6,500 for those over 50) and this equates to $60,500 in annual savings. – Over a 10 year period, compounded annually with the same 10% rate of return, your savings become the same $1,060,636, – in 20 years $3,811,651, – and after 30 years, you will have $10,947,077.

SIMPLE IRA

The SIMPLE IRA strategy won’t earn you the same $1 million in 10 years, but you still can have $3.5 million after 30 years. In order to work the SIMPLE strategy, you must be willing to contribute the maximum amount to both your SIMPLE IRA and Traditional or Roth IRA. This means you will be contributing $18,000 per year. ($12,500 for the SIMPLE + $5,500 for the IRA). So, by contributing $18,000 in savings per year, compounded annually, with an assumed 10% rate of return, you will have $315,561 after 10 years – $1,134,045 after 20 years – and $3,256,982 after 30 years. Not bad at all for the small business owner with employees.

TAX ADVANTAGES

Again, there are additional benefits to contributing to a Self-Employed 401(k), SEP IRA or SIMPLE IRA – the tax deferred growth. When you contribute to the Self-Employed 401(k) and SEP IRA, you lower your taxable income by $55,000. Depending on your tax bracket (if you’re in the 37% tax bracket), this can be up to $20,350 in current tax savings each year.

Just think, you could be saving in taxes each year while simultaneously contributing to your retirement. – Making $1 million, $3 million, or even $10 million does not have to be that hard.

Plug in the numbers to see for yourself – Bankrate Investment Calculator https://www.bankrate.com/calculators/retirement/investment-goal-calculator.aspx

Consult a Tax/Financial Advisor for help determining the right business taxation and retirement account.

The post Self Employed? You Can Make $1 Million In 10 Years appeared first on New Century Investments.

Make Sure to Consult a Tax/Financial Professional for Your Inherited IRA.

• Naming a trust as a beneficiary of your retirement account can help protect heirs who are minors, disabled or vulnerable to creditors.
• Failing to correctly structure your trust could accelerate the liquidation of your IRA, resulting in a massive taxable distribution.
• Remember: Trusts only need $12,500 of taxable income in 2018 ($12,750 in 2019) in order to be subject to the top tax rate of 37 percent.

You wouldn’t trust your toddler with a pile of cash, right? Well, this estate-planning technique may allow you to safely pass your IRA on to future generations — if you do it right. When it comes to naming a beneficiary of your retirement account, the first person to come to mind is likely your spouse. Your kids, if you have them, might be a close second. However, your children or grandchildren won’t always be in an ideal position to receive a windfall, particularly if they are minors, disabled or spendthrifts. That’s when a trust might make sense.

“The real reason for having a trust as an IRA beneficiary is because there’s some element of control,” said Ed Slott, a CPA and founder of Ed Slott & Co. “People who name trusts as beneficiaries are doing it to protect a very large IRA.” It’s easy to mess up this, however. In the first place, not all IRA custodians permit you to list a trust on your beneficiary form. Second, the tax code has a specific list of conditions for trusts that act as beneficiaries to retirement accounts. Failure to closely follow the IRS rules could result in an accelerated distribution of your IRA and a raft of taxes. Here’s what you should know.

Four conditions
In order for a trust to be viable as a designated beneficiary, it must meet a four-part test.

1. It must be valid under your state’s law.
2. It must be an irrevocable trust — a trust that generally can’t be changed once it’s established — or one that will become irrevocable at your death.
3. The beneficiaries must be identifiable from the trust document.
4. The IRA custodian or retirement plan administrator must have received a copy of the trust by Oct. 31 of the year following the year of the IRA owner’s death.

There is an unofficial fifth rule, according to Slott: All of the trust beneficiaries must be actual people — not charities and not your estate. That’s because if your beneficiaries aren’t people, then your IRA may not have a designated beneficiary at all. In that case, your heir misses out on a key estate-planning strategy that will allow her to “stretch” the inherited IRA by taking required minimum distributions based on her much longer life expectancy. Even worse, if your trust fails the test, it’s subject to the rules that kick in when you have no designated beneficiary for your IRA. That means your retirement account will be depleted earlier than you would have intended. If you die before you start taking required withdrawals, which start at age 70½, your IRA must be distributed within five years after you’ve died. If you die after you started your RMDs, then your distributions will continue to pay out over what would have been your remaining (and presumably shorter) life expectancy .

Types of trusts

The type of trust you select as a beneficiary matters. There are generally two to choose from. A conduit trust distributes the IRA’s RMD directly to the beneficiary. “Grantors often set up a conduit trust if they trust the child, or if the child isn’t in a high-risk profession,” said Stephen Bigge, a CPA and partner with Keebler & Associates. If you’re worried that your child is a spendthrift or that creditors may try to seize the money, consider a discretionary trust. In this case, RMDs pass from the IRA to the trust, and the amount of money that passes to your beneficiary is ultimately up to your trustee. Be aware of a potential tax trap here: RMDs are taxable income to the beneficiary when he receives it, but if the distribution is held in the trust, then the trust will owe the taxes.

Income tax
Consider that in 2019, the top marginal income tax rate of 37 percent is at $510,301 in taxable income for singles and head of household ($612,351 for married filing jointly). On the other hand, the 37 percent tax rate for trusts kicks in at $12,751 in taxable income. This can present a conundrum for the trustee overseeing a discretionary trust, especially if the beneficiary can’t be trusted with the money. “It’s an income tax versus fiduciary responsibility issue,” said Bigge. “You have a $50,000 RMD. Will the trust give the money to the kid or not?”

Multiple beneficiaries
Perhaps you have several children, and you’d like to pass your IRA proceeds through a trust for their benefit. The best way to proceed is to consider creating a trust for each child.

Separate trusts allow each beneficiary to have RMDs based on his or her own life — and they also reduce strife among heirs. “The beneficiaries might also have different cash flow needs and different tax loads,” said Tim Steffen, director of advanced planning at Robert W. Baird & Co. “One might want to take the money out, the other wants to leave the money in.” Be sure that your trust documents clearly state the names of the beneficiaries, so that it meets the IRS four-part test. “It’s better to name the kids individually than to do something like ‘for the benefit of my three children,'” Steffen said.

Avoid these mistakes
Naming a trust as the beneficiary of an IRA isn’t for beginners. Coordinate with your estate-planning attorney and accountant before you proceed. That way, you can be sure to avoid these common errors: Inadvertently placing the IRA in the trust: If you write a check from the IRA to the trust, then you’ve botched the “stretch” IRA and you’ve just made a taxable distribution. Instead, set up a properly titled inherited IRA, said Slott. He provided an example of how it should look. “John Smith, IRA Deceased 11-15-18 f/b/o , John Smith Family Trust, beneficiary.” This way, you preserve the IRA and the only money that goes to the trust is the RMD. Failing to review your beneficiary forms: Why go through the work of setting up a trust if you’re going to omit the key step of naming it as the IRA beneficiary? Revisit your beneficiary designations and make sure they reflect your wishes. If you have separate trusts for your beneficiaries, name them on the form. Being vague about your trust details: Specificity is everything. Be sure that your trust beneficiaries are identifiable by name, and make sure that they are people — not charities and not your estate.

Article from Darla Mercado with CNBC

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