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The Reasons for a Roth Solo 401(k)

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

 

Provided by MidAmerica Financial Resources

                                                                                                                                

Self-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 If you abide by IRS rules, the Roth contributions you make, and the earnings they generate, can be eventually be withdrawn tax-free.2,4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

   

MidAmerica Financial Resources may be reached at 618.548.4777 or greg.malan@natplan.com.

www.mid-america.us

 

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. Plan distributions may be subject to tax and 10% penalty if withdrawn before age 59 ½. To qualify for the tax free penalty free withdrawal of earnings, a Roth IRA must be in place for at least five tax years, and the distribution must take place after age 591/2 or due to death, disability, or a first time home purchase (up to $10,000 lifetime maximum). 

 

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]


What Does the Devalued Yuan Mean for the U.S.?

A look at China’s unexpected move & its potential impact.

 

Provided by MidAmerica Financial Resources

                                                                                                                                

China has surprised global investors by weakening the yuan almost 5%. Its central bank may even weaken it further.1,5

 

Why did the PRC make this move? Its long-booming economy is in a slump. Most notably, Chinese exports have taken a major fall. In July, they were down 8.3% year-over-year. By depreciating the yuan, China is trying to help its exports maintain their competitive edge.2

 

Some of China’s other economic indicators have also disappointed lately. Chinese imports have retreated for nine straight months, slipping 6.1% for June and another 8.1% in July. The pace of retail sales in China slowed to a 15-year low in July. Producer prices in the PRC suffered their largest annualized slip since 2009 last month. Lastly, the nation’s economy may grow less than 7% this year – which would be the worst showing since the 1990s.1,2

   

How may this impact America? The effects could be felt in several areas of our economy, and there could be some positives as well as negatives.

   

The Federal Reserve might decide to postpone a rate hike. Our central bank appears committed to raising interest rates before the year ends, perhaps as early as next month. A repeatedly devalued yuan might make the Fed think twice about that, however. China has effectively strengthened the dollar versus the yuan, making Chinese imports to America cheaper. That could lower consumer inflation pressure, and since annualized inflation in this country is already low, there would be less incentive for the Fed to raise rates. That would be bad news for savers but better news for some mortgage holders.3

  

Consumers could benefit more than businesses. As referenced above, a weakened yuan makes imported goods from China less expensive for Americans. Conversely, it also makes it that much harder for U.S. businesses to sell their products in the PRC, as Chinese consumers will have reduced purchasing power.3  

 

You may see less hiring. A mightier greenback relative to the yuan means new hurdles for U.S. businesses in China, which could cut into earnings growth. While scores of American firms sell directly to Chinese consumers, others have strong ties to Chinese factories: look at Apple, which outsources the production of its iPads and iPhones to the PRC. A devalued yuan essentially whittles down the income U.S. businesses create in China and makes outsourced manufacturing costlier for American firms. You can draw a fairly direct line here: less income and lower earnings for American businesses could lead to slimmer payrolls. In particular, firms in the technology, energy and materials sectors could be impacted.1,3  

   

Oil & gas could become even cheaper. Oil is a dollar-denominated commodity, so a newly weakened yuan will test China’s demand for it. A stronger dollar relative to the yuan means that oil and oil-based products will be costlier in China. The Chinese might react by decreasing oil consumption. If China’s demand for oil lessens, that would help to keep oil prices low and American drivers would likely see lower gas prices as well.3

      

How about the markets? Equities seem to have regained their footing. When the PRC started devaluing the yuan on August 11, Wall Street read the move as a distress signal. The Dow opened with a triple-digit drop August 11 and lost 212 points for the day. On August 12, it took an even bigger fall at the open on news of the yuan weakening again, but it was down just 0.33 points at the close. The week’s subsequent trading days brought no further dives at the opening bell. Looking at the global picture, the DAX, CAC 40, Nikkei 225, and Shanghai Composite were all up 1% or more shortly after they opened Thursday.4,5 

 

As for the forex market, the yuan has certainly sunk versus other key currencies. By August 13, it had lost nearly 3% against the dollar over the past five trading days, and almost 5% against the euro.6

 

Is a global currency war about to heat up? The People’s Bank of China insists it does not seek to start one. A Barclays client report released August 13 noted the PBC “downplaying the need for a weaker yuan” at a press conference and refuting claims it wanted to devalue the currency at least 10% to support exports. Yi Gang, one of the PBoC’s deputy governors, stated that there was “no basis for a persistent weakening in the yuan... and that the aim of the PBoC is to have the market determine the exchange rate.”5

 

If the yuan does keep sliding and global markets slump significantly, the Federal Reserve and the European Central Bank could react supportively, providing investors with some reassurance. A weakened yuan presents another challenge to the Fed’s plans to tighten.

 

MidAmerica Financial Resources may be reached at 618.548.4777 or greg.malan@natplan.com.

www.mid-america.us

 

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. International investing entails special risk considerations, including currency fluctuations, lower liquidity, economic and political risks, and differences in accounting methods. Past performance cannot guarantee future results.

    

Citations.

1 - foxbusiness.com/markets/2015/08/12/us-stock-futures-slump-as-china-devalues-yuan-again/ [8/12/15]

2 - marketwatch.com/story/chinas-economy-enters-second-half-of-2015-on-weak-note-2015-08-09 [8/9/15]

3 - usatoday.com/story/money/business/2015/08/12/yuan-and-you-how-chinas-devalued-currency-affects-us-consumers/31524925/ [8/12/15]

4 - money.cnn.com/data/markets/dow/ [8/13/15]

5 - usatoday.com/story/money/markets/2015/08/13/market-calm/31610769/ [8/13/15}

6 - money.cnn.com/data/currencies/ [8/13/15]

 





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