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Welcome to How to Retire on Time, a show that answers your retirement questions. Say goodbye to the oversimplified advice you've heard hundreds of times. This show is about getting into the nitty-gritty so you can make better decisions as you prepare for retirement. Text your questions to 913-363-1234 and we'll feature them on the show. Don't forget to grab a copy of the book, How to Retire on Time, or check out our resources by going to www.retireontime.com.
Welcome to How to Retire on Time, a show that answers your questions about all things retirement, including income, taxes, Social Security, health care, and more. This show is an extension of the book, How to Retire on Time, which you can grab today on Amazon or go to www.how to retire on time.com. My name is Mike Decker. I'm the author of the book, How to Retire on Time, but I'm also a licensed financial adviser, insurance agent, and tax professional, which means when it comes to financial topics, we can pretty much discuss it all. Now that said, please remember this is just a show.
Mike:Everything you hear should be considered informational, as in not financial advice. If you want personal financial advice, well, just request your wealth analysis today from my team by going to www.yourwealthanalysis.com. With me in the studio today is mister David Fransen. David, thank you for being here today.
David:Yeah. You're welcome.
Mike:Now David will be reading your questions, which you have submitted, and I'll do my best to answer them. You can send your questions in right now or anytime during the week. Just save this number. Save it right now. 913-363-1234.
Mike:That's 913-363-1234. Or you can email them to hey mike at how to retire on time.com. Let's begin.
David:Hey, Mike. How should self employed people save for retirement? For example, should we fund SEP IRAs, simple IRAs? It's a bit confusing, at least for me.
Mike:Alright. Instead of making this a tax planning course, I don't wanna let me give you a a high level example.
David:Okay.
Mike:Instead of looking at first SEP simple all these different plans and how to structure getting money into qualified accounts, which is helpful. 1st, you need to understand when do you wanna retire and then how much income will you need before you turn 59a half. So if you wanna retire before 59a half, you're going to need some assets that are not in qualified accounts this is often missed I've spoken with 45 to 50 year olds who say I'm going to retire next year and I'll say how are you going to do it they say well everything's in my 401 k
David:oh boy
Mike:and I'd say well you're gonna pay a huge penalty to take out those funds right now. Yeah. And then we have to work out how to incorporate things like the rule of 55 and other ways to slowly get funds out of the 401 k when they retire. So the first step is to first put that lifestyle plan together and figure out how much do you need in the non qualified bucket. So non qualified, your brokerage account, for example.
Mike:And then how much goes into the investment side, so longer term investments. How much goes into your reservoir? So like CDs or treasuries or maybe cash value life insurance as well. Basically, just a way that you can pull income out of a principal protected source in case the markets were to go down during this period of time. And then the rest of it can can focus more towards the qualified assets that you can touch once you're 59a half.
Mike:Are you with me so far, David? Yep. Post 59a half, that's where you're you're talking here. Here's the basic, the gist of it. SEP IRAs or simple employment pension IRAs is what SEP means is, in my opinion, really for the self employed person.
Mike:Think like a 10.99 employee, whether you're a contractor with your own entity, maybe you're just your own business, your own LLC, your own sole sole proprietor, whatever it is, and you're making less than $264,000 in gross revenue, and that that number will come up in just a second as as to why, but it's less income than that amount. You can contribute up to 25% of your compensation. So how much you're paying yourself, and you need to do this correctly. So find an account and find a CPA or an enrolled agent that can help you with this us. But you can contribute up to 25% of your compensation or up to as of 2024.
Mike:I I believe it's 66,000 is the maximum you could contribute, but it's up to 25% or 66,000 or so, whichever is less. So if you're making a $100,000, you can't put 66 k in your SEP. Because 25% of a $100,000 is 25,000. That's the maximum you could do. But it's a way that an individual person can just create a very simple, low cost, easy way to put funds in there for the self employed, the 10.99, situation.
Mike:Now all that said, I I also wanna just say this. I really like SEPs
David:Uh-huh.
Mike:Because you could open up a SEP and work with a money manager like me and use, like, our models, for example, to grow it instead of the very rigid four zero one k model of where you you can buy these mutual funds, these ETFs, and and hold. I just passive investments in qualified accounts bug me because I believe you can do more if you're actively managing it and you've got a model that has a good track record. Yes. So SEPs enable that. They allow that.
Mike:For all the self employed people out there, the people running your business, call us about what what more could be done. This is a really cool situation. Now that's the SEP IRA. Okay? The COG and I don't actually know how to say it.
Mike:The COG, k e o g h plan, nicknamed HR dash 10 plan, is also for self employed people or unincorporated businesses, sole proprietors, partnerships, whatever it might be. That's really defined for the higher income person. So they can they still have the same situation, 25% of compensation or 66,000, whichever is less. But based on how you structure your your compensation afterwards, you might be able to get a little bit more out in different situations. The the code plan is much more complicated because you've got to start bringing in actuarial projections on how you're gonna take the income and what you're gonna do with it.
Mike:So as a general rule, I just recommend you stick with the SEP unless you wanna actively work with the CPA who can help you set up and maintain the code plan. Mhmm. And then you've got the simple IRA. The simple IRA is really a 4 one k simplified. So think of it that way.
Mike:4 one k simplified is the simple IRA for small businesses with a 100 employees or less. In this situation, employees can contribute up to a certain amount. There's some some cool things with employer and employee contributions in there, but it's it's really just a simple low fee way for smaller businesses to offer benefits, retirement benefits, without going into the higher cost 401k space
David:yeah 401ks require a lot more what the make what makes them more expensive than a simple
Mike:well there's just there's more I don't want to say necessarily regulations but administrative costs bookkeeping kind of how it's structured all the reporting
David:like some kind of compliance and record keeping etcetera etcetera.
Mike:It just requires more. Yeah. Yeah. So they they made it simple for a certain group, which if you're if you're a business owner with a 100 employees or less, maybe it's a good situation for you. Yeah.
Mike:Maybe you go with the 401k route though. You need to compare the 2, but I want to just give definitions to what what is out there.
David:Alright.
Mike:So I mean, basically, SEPs, good for for self employed people that are making 264,000 or less. That number will change as the limits change over time.
David:Right.
Mike:The COG, probably for higher income earners that are self employed or have partnerships in very specific situations, the simple for small business owners that wanna offer benefit, but not have as much cost associated with it, and then you got the 401 k, which is for the private sector, and then, you know the 403 b's the 457s all that those are different we're talking just the private sector here and what the options could be and really here's where my mind goes let's say you're a small business or let's just say you're self employed
David:Okay.
Mike:You're self employed and you're thinking, you know, which way should I go? Put your plan together first. How much income do you expect to make? How much do you want to save? And how much do you want to receive when you retire?
Mike:What what what does it mean to retire on time for you? Some people don't wanna retire at 60 years old because their work gives them purpose. So you've gotta define your plan, which a plan really is, what do you want to happen? Then you start looking at the strategies that are in there. So if you wanna retire earlier, before 59 and a half, maybe you don't save a ton of money in an IRA.
Mike:Maybe you're you need to focus more on the nonqualified because you've already saved enough in that SEP IRA. These are the kind of balanced questions that need to be assessed. As you're working, are you maximizing your your Roth? Anyway, we could talk for hours on this, but to understand how much goes where really requires a plan first so you have context on how much should go into each tax bucket. Each tax bucket would be defined, in my opinion, is and I try to keep it simple, as qualified pretax, which is like an IRA.
Mike:So it's before taxes. It goes in there. It grows tax free. But when the money comes out, you pay income taxes. Qualified after tax, like your Roth, so you've already paid the taxes, it's in a qualified account, it grows tax free, and you can take funds out tax free.
Mike:And then nonqualified, which means there's no it doesn't qualify for retirement benefit, so it basically grows, but you pay taxes capital gains tax on the gains, whether that's short term or long term. But unless you can really give meaning and say, I'm doing this for this reason, unless you can articulate these assets are in these places and these accounts for x y z, it's really hard to decide which way you wanna go, in my opinion. I mean, you could just say, well, I'm self employed. I'll just defer to the SEP. But then how much should you put in the SEP?
Mike:How much should you keep in after tax? Do you need life insurance for business purposes? And does it make more sense to do term? Does it make sense more sense to do permanent? This is where the comprehensive planning really comes to play on how you can find efficiencies to potentially get more out of your hard earned money.
Mike:Your cash flow, especially as a business owner, matters. So you wanna make sure it goes to the right places. If you're a small business owner, self employed, thinking about being self employed, or just exploring how to fund qualified accounts correctly. Let's say you work for a major company, and you're wondering how much did you put in your 401 k after tax and how you wanna set up for retirement, how you want to prepare for retirement, I want you to text analysis, that keyword analysis, to 913-363-1234 or go to www.yourwealthanalysis.com today. And here's what's gonna happen.
Mike:You follow some basic information, so I understand kind of what you're looking for. You're gonna define the relationship you're looking for, whether it's DIY, whether that's a collaborative relationship, whether that's a comprehensive relationship. We figure out your lifestyle legacy goals in the 30 minute call, and then I run the analysis to show you what could be done, so we can explore your lifestyle legacy potential, so we can show you how to potentially get more out of your hard earned money. These little efficiencies can make a huge difference overall in your quality of life. And all you gotta do is just text analysis right now to 913-363-1234, or go to www.yourwealthanalysis.com to learn more and get started.
Mike:Doesn't cost you a dime, but really could make a difference. Go there today, and we'll talk soon. That's all the time we've got for the show today. If you enjoyed the show, consider subscribing to it wherever you get your podcast. Just search for how to retire on time.
Mike:Discover if your portfolio is built to weather flat market cycles or if you're missing tax minimization opportunities that you may not even know exist. Explore strategies that may be able to help you lower your overall risk while potentially increasing your overall growth and lifestyle flexibility. This is not your ordinary financial analysis. Learn more about Your Wealth Analysis and what it could do for you regardless of your age, asset, or target retirement date. Go to www.yourwealthanalysis.com today to learn more and get started.