A Sep IRA stands for simplified employee pension plan which allows an employer to have a simplified way to contribute to an employee’s retirement plan. It also allows them to contribute to their own retirement savings.
Contributions are made to an IRA or Annuity IRA for each employee who participates. This is a SEP IRA.
A SEP IRA account is a Traditional IRA and has the same investment, distributions, and rollover rules as a Traditional IRA.
1. What are the best SEP IRA plans?
As SEP IRAs are considered Traditional IRAs by the IRS. And they have to be set up by your employer the clear answer is a Traditional IRA.
This also means that it will have to same rules in regards to contributions, distributions, and tax related benefits. We discussed these in an earlier post.
Also, any plan that you contribute to is a great plan. The point of all this is to show you the light and help you take action.
2. Can I open a SEP IRA?
If your w2 income comes from that employer then you will need to participate in their retirement plan. If they are small enough they may have a SEP IRA plan for you to participate in.
You also can open up your own Traditional or Roth IRAs as well.
There is a serious retirement crisis in America. Too many people have little to no savings and aren’t doing anything to help their situation.
45% of Americans have saved nothing for retirement, including 40% of Baby Boomers. 38% don’t actively save for retirement at all. 20% of Americans dip into their 401k accounts early.
The good news is that you can change your situation and that is why we are continuing our discussion of different retirement vehicles and how they can help you on your journey to save for retirement.
Next up we will look at what a Roth IRA is and how it can be of benefit to you.
What is a Roth IRA?
A Roth IRA is a special retirement account where all the taxes are paid up front and then all future withdrawals are free. This differs from the Traditional IRA which defers all the tax consequences until a later time.
There are no upfront tax deductions like there is with a Traditional IRA. The great thing about the Roth IRA is that there are no penalties for distributions from monies that are contributed.
What this means is that any monies you contribute are tax-free at any time during its time in a Roth IRA. You would be responsible for any taxes due on the earnings or dividends paid .
In other words, any money that is earned would be taxed but not the original contribution.
Well, it stands for Individual Retirement Account. And it can be broken into several different types of IRAs. Today we are going to talk about one of the most common ones, the Traditional. The two most common being the Traditional and the Roth. We will tackle the Roth in the next episode.
There are several more types of IRAs that we will be discussing in future episodes among them being the SEP, Keogh, Simple and the newest addition to the family, the myRA.
Dollar Cost Averaging or DCA is the technique of buying a fixed dollar amount of an investment on a regular schedule, irrespective of the price. The theory being that more shares are purchased when the price is low and fewer shares purchased when the price is high.
The most common examples of this are your 401k and 403b investment plans through your employer. Every paycheck you have a set amount set aside to purchase a predetermined investment at whatever price is currently being offered.
The most common vehicles for the use of this type of investment are mutual funds or ETF(exchange traded funds). Typically these are the choices offered in most employer retirement plans. The best option to look for in mutual funds is a no-load fund.
What are the DRIPs you ask? Well, it is not the dripping of the faucet in the bathroom that keeps you up all night! DRIPs stands for dividend reinvestment plan. Which means that it is a plan that allows investors to reinvest their dividends into buying more shares of that particular company. This is usually done in fractional shares or additional shares.
DRIPs are an awesome way to increase the value of your investment. One of the cool things about this reinvestment plan is that it allows you the ability to buy more shares without paying an additional purchase price. With DRIPs, you don’t receive a dividend check tempting you to cash it out or use it to pay bills. Every penny in dividends is automatically reinvested for you to purchase additional shares of the company. These additional shares produce dividends, too. By allowing the dividends to be reinvested, you tap into the power of compounding growth without ever having to think about it. More on this in a moment.
The rule of 72 is a shortcut to estimate the number of years required to double your money at a given annual rate of return. The rule states that you divide the rate, expressed as a percentage, into 72:
Years required to double investment = 72 ÷ compound annual interest rate
Note that a compound annual return of 8% is plugged into this equation as 8, not 0.08, giving a result of 9 years.
Based on our conversation earlier about compounding and how it is your friend. We are going to discuss how the rule of 72 can help you.
A simple word with a huge meaning. It is one of the hardest habits to establish in our financial life but arguably one of the most important. Because without savings we have nothing to utilize to help grow our money.
So how do we save money? I am sure you have heard this before but saving money is the most important thing you can do for your financial health. The first axiom of finance is to pay yourself first. Before you pay any bills and buy anything you must set aside money for your savings or investments. The rule is to save at least 10% of your take home pay every check. This may sound like a lot but it is an absolute must if you are going to establish any sort of saving plan with the goal to grow your money. Like anything you start small and grow towards your goal. I always say you can’t eat the whole pizza at once, as much as we would like to, but you need to eat it piece by piece. So if 10% is too much of a bite at first start at 5% and work your way up. You could do this gradually and as you increase it will feel less and less painful until you are at the 10%.
So how much do i need for retirement really? Part of the scariness or vagueness of that question is what makes people nervous about the actual answer. We are taught that retirement is a long ways off so who needs to really think about it and I will deal with it later.
One of the things that makes putting off retirement planning is that we don’t really know how much we are really going to need. The generally accepted number is:
Did you know that over one third of all Americans have no retirement savings at all! One of the goals here is to try to take the scariness out of retirement planning and what we can do to help you save more money and what to invest it in. Some more sobering stats for you:
Over 89% of all employers offer some type of 410k but only 75% contribute to their plans
But with this contribution rate would you be surprised to find that over 35% of people over 65 rely on social security alone.
Around 1 in 5 tap into their retirement plans for either a distribution or loan