This May, Simply Money Advisors is becoming Allworth Financial. As we expand our services to better meet your retirement planning needs, we needed a name that encompasses all that we are. Don’t worry. We’ll still deliver our same no-nonsense money advice every week in the Simply Money column, presented by Allworth Financial.
Kenneth in Campbell County: I’m thinking about starting my own business and want to make sure I’m still saving for retirement. What are my options?
Answer: Congratulations! Small business owners are the lifeblood of the American economy, so we wish you all the best. We’re also thrilled you’re keeping retirement a priority – sometimes it gets put on the backburner in the early stages of a new business.
If you’re going to run your business by yourself with no employees, there’s something that’s (fittingly) called a Solo 401(k). This offers tax-deferred growth: you get an up-front tax break now, then pay ordinary income taxes when you withdraw the money in retirement. There are no income or age restrictions for contributions, and you can save up to $56,000 in 2019 ($62,000 if you’re age 50 or older). There’s also a Solo Roth 401(k). Contributions to this account are made with after-tax money, but earnings come out tax free once you’ve held the account for five years and are at least 59 ½. (Note: If you save in both, the contribution limit is a combined limit.)
On the other hand, if you’ll have employees, you’ll need to look at a SEP (Simplified Employee Pension) IRA or a SIMPLE (Savings Incentive Match Plan for Employees) IRA.
A SEP IRA offers tax-deferred growth and is funded completely by you, the business owner. In 2019, you can contribute up to 25 percent of an employee’s salary, or up to $56,000 (whichever is less). You can choose when to contribute (doesn’t have to be every year), and you would have to contribute the same percentage for all employees. According to the IRS, a SEP IRA is most popular for small businesses with less than 100 employees. A SEP IRA can also be used by a sole-proprietor in lieu of a Solo 401(k).
A SIMPLE IRA is also tax-deferred, but in this case, most of the funding comes from employee contributions (no employer contribution required). This can take much of the financial burden off you as the business owner. The 2019 contribution limit is $13,000 ($16,000 if age 50 or older).
Here’s The Simply Money Point: Your final decision hinges a lot on whether or not you’ll have employees. A fiduciary financial advisor can go over your options and help you make the best decision for your particular situation.
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Trish and Keith from Batavia: What’s the difference between a money market account and savings account? And which is better for an emergency fund?
Answer: These two types of accounts have a lot in common, but there are a few subtle differences.
A traditional savings account is pretty straightforward. You deposit money and it earns interest. However, a big downside right now is ultra-low interest rates – the national average for a savings account is currently about 0.10 percent APY (annual percentage yield). That means $10,000 would earn just $10 over the course of a year (assuming daily compounding).
A money market account is slightly different. You’ll likely get a better interest rate (the current national average is about 0.21 percent, but local banks and credit unions are paying above one percent in some cases), but there’s a trade-off: you’ll probably need to keep a higher minimum balance in the account. A money market account also provides the option of check writing and/or a debit card, but federal law limits the number of withdrawals to six per month.
Keep in mind that online banks generally offer much higher interest rates than the previously mentioned national averages for both savings accounts and money market accounts, so always do your research at a site like Bankrate.com.
The Simply Money Point is that both types of accounts are FDIC insured, so choosing between the two comes down to how much you’re putting in the account, how often you need to access the money, the ease with which you can access your money, and the interest rate you can get. Either can work as a place to keep emergency fund money.
Responses are for informational purposes only and individuals should consider whether any general recommendation in these responses are suitable for their particular circumstances based on investment objectives, financial situation and needs. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing, including a tax advisor and/or attorney. Nathan Bachrach and his team offer financial planning services through Simply Money Advisors, a SEC Registered Investment Advisor. Call (513) 469-7500 or email email@example.com.
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