Maximize Your Retirement Potential: Navigating Tax Deadlines for Individual 401(k) and SEP-IRA
The individual or solo 401(k) and the Simplified Employee Pension IRA (“SEP-IRA”) are probably the two most prevalent types of retirement savings accounts for the self-employed. They both offer a number of advantages, but there are a number of rules surrounding these accounts as well. Understanding Individual 401(k) and SEP-IRA An individual 401(k), also known as a solo 401(k) or a one-participant 401(k), is a retirement savings plan designed for self-employed individuals and small business owners with no employees other than their spouse. Partners in the business may also participate. The solo 401(k) offers the opportunity to contribute as both an employer and an employee, allowing for higher contribution limits compared to IRAs. Employee contributions can be made up to the same annual limits as an employer 401(k) plan. A SEP-IRA is a retirement plan suitable for self-employed individuals and small business owners with a few or no employees. The SEP-IRA enables employers to make contributions on behalf of both themselves and their eligible employees. These plans are known for their simplicity in administration and flexible contribution amounts. No employee contributions are allowed. Comparing the Solo 401(k) and SEP-IRA Both types of plans offer some benefits and some drawbacks. Solo 401(k) Benefits: 1. Higher Contribution Limits: Individual 401(k)s often allow for higher contribution limits compared to a SEP-IRAs, enabling you to save more for retirement. 2. Dual Contributions: As both an employer and an employee, you can contribute to the plan, maximizing your savings potential. This can be especially important if your income slips in a particular year. 3. Catch-up Contributions: If you are 50 or older, you can make additional catch-up contributions, further boosting your retirement fund. For 2023, this is equal to $7,500 if you are 50 or over. 4. Loan Options: Some individual 401(k) plans offer loan provisions, allowing you to borrow against your account balance if needed. This will depend upon the custodian offering the plan. 5. Roth Option: Depending on the plan, you might have the option to make Roth contributions, providing tax-free withdrawals in retirement. Drawbacks: 1. Complexity: Compared to SEP IRAs, individual 401(k)s can be more complex to set up and administer, especially if you are the only participant. 2. Administrative Burden: With higher contribution limits come additional administrative responsibilities, a solo 401(k) can potentially require more paperwork, especially when the account balance exceeds $250,000. 3. Potentially Costlier: The administrative and setup costs associated with an individual 401(k) may be higher than those of a SEP-IRA. SEP-IRA Benefits: 1. Simplicity: SEP-IRAs are relatively easy to establish and maintain, making them an attractive option for small business owners and self-employed individuals. 2. Flexible Contributions: Employers have flexibility in deciding how much to contribute each year, offering adaptability based on business performance. Contributions are made as a percentage of employee compensation. 3. No Discrimination Testing: Unlike a small business 401(k), SEP-IRAs do not require complex nondiscrimination testing, simplifying plan management. 4. Tax Deductible Contributions: Employer contributions to SEP-IRAs are tax-deductible, reducing your business taxable income. 5. Roth Option: With the passage of Secure 2.0, SEP-IRAs can now offer a Roth option. Drawbacks: 1. Limited to Employer Contributions: Unlike individual 401(k)s, only the employer can contribute to SEP-IRAs, and contributions are solely based on a percentage of employee compensation. If that compensation is particularly low in a given year, this can limit the business owner’s ability to contribute. 2. Employer Contribution Percentages: For a plan with employees, the employer must contribute the same percentage of compensation for each eligible employee as they do for themselves. This can make the SEP-IRA an expensive proposition in some cases. 3. No Catch-up Contributions: Unlike individual 401(k)s, SEP IRAs do not offer catch-up contribution options for those aged 50 or older. Key Deadlines for Establishing and Funding Individual 401(k) An individual 401(k) must be established by December 31 of the current year in order for funding to be allowed for the current tax year. Typically, employee contributions can be made up to December 31 for the current year. Employer contributions can be made up to the tax filing deadline for the business, including extensions. For a sole proprietor, these dates will be the same as for the owner’s individual returns. If they file a separate business tax return, the dates will coincide with the business tax filing dates. It is always best to consult with your tax professional on this. SEP-IRA A SEP-IRA can be established and funded up to the tax filing date for the business, including extensions. As with a solo 401(k), this will either be the filing dates of the owner’s individual return or business return depending on their situation. Contribution Limits Solo 401(k) The annual contribution limits for employee contributions are the same as for an employer sponsored 401(k). For 2023, these limits are $22,500 plus an additional $7,500 in catch-up contributions for those who are 50 or over. Employer profit sharing contributions are based on 25% of employee compensation up to a limit of $66,000 or $73,500 for those who are 50 or over. SEP-IRA All contributions to a SEP-IRA are made by the employer. They are based on 25% of employee compensation. The limit for 2023 is $66,000. Which plan is right for you? This will depend upon your situation, including your income and cash flow. Your Wedbush financial advisor can help you choose between a solo 401(k), a SEP-IRA or other options to save for your retirement. Disclosure Wedbush Securities does not provide tax or legal advice. Please consult your tax or legal advisor. These materials are provided for general information and educational purposes based upon publicly available information from sources believed to be reliable — we cannot assure the accuracy or completeness of these materials. The information presented is not intended to constitute an investment recommendation for, or advice to, any specific person. The information presented here is not specific to any individual’s personal circumstances. To the extent that this material concerns tax matters, it is not intended or written to
Strategic College Planning: Why You Should Apply for FAFSA
If you have children heading to college next year, keep in mind that the Free Application for Federal Student Aid (“FAFSA”) window opens on December 1. This is a new deadline based on major changes that are coming to the form for 2024-25. The FAFSA is used by the federal government to determine if a student is eligible for various federal financial aid programs. It is best to complete the FAFSA as early as possible because many states and colleges also use it to award their own grants, scholarships and loans, and that aid is limited. The Importance of a College Education A college education can be a gateway to many career and life opportunities for your children. Besides knowledge and skills needed for many career options, college promotes critical thinking, communications skills and a broader world view. A college education can lead to: Enhanced career opportunities Personal growth Networking opportunities Higher lifetime earning potential Key Dates to Remember The earliest date to submit the FAFSA for the next college year is December 1. In the past, the form was available October 1, but due to changes and improvements, the new form will be available in December 2023, not Oct. 1. If you cannot submit the application by that date, it is important to try to complete the FAFSA for your student as soon after that date as possible. This allows your child to receive consideration for a variety of aid opportunities that can help offset the high cost of college. The latest date the FAFSA for the upcoming school year can be submitted is June 1. Completing the FAFSA as early as possible is important for a number of reasons, including: Some forms of financial aid are distributed on a first come, first served basis. · In some cases, there is only a finite amount of aid available, meaning that when it is gone, it is gone. Receiving responses from some aid providers early on can provide families with a clearer picture of their financial situation for the upcoming school year. Early decisions allow parents the opportunity to explore additional options if needed. Waiting until the last minute to apply may limit additional options for your student. Early applicants may have access to a wide range of grants, scholarships and low interest loans. Early applicants may also have greater access to one of the many work-study programs available. Besides the federal filing deadlines, some states may have different deadlines. These dates are important in that there can be state aid available in some cases. Process overview Dependent students will need to provide both their own financial information as well as information for their parents. An independent student needs to include only their own financial information. The type of information that is generally needed to file the FAFSA include: The Social Security numbers of the student and their parents. If the applicant or the parents are not U.S. citizens then their alien registration number will be needed. Federal tax returns, any W-2 or 1099 forms and other applicable information to document the income of the student and their parents. Bank and investment account information may be required in some cases. This might include information about any 529 plans depending upon the ownership. Any information about untaxed income if applicable. We strongly encourage you to gather all necessary information prior to starting to complete the FAFSA form. This will make the process go much smoother for you and make it less likely that you will make an error or omit key information that could delay the finalization of your submission. Help Completing the FAFSA There is help available to complete the FAFSA and to answer questions you may have. Many states offer online help and, in some cases, workshops. There is a federal student aid online guide available as well. Beyond this, there are a number of online workshops on how to complete the FAFSA. Conclusion The FAFSA is a key part of your efforts to cover the costs of college for your college aged kids each year. It is important to complete and submit the FAFSA as soon as possible after the October 1 start date. This allows your student to be considered for all types of aid, whether at the federal, state or institutional level. College can be very costly between tuition, books, room and board as well as other costs. Avoiding debt to the extent possible for your student can help them on their way towards building a financially successful future once they graduate. Contact your Wedbush advisor with questions about funding college expenses for your kids. They can help incorporate this into your financial planning efforts. Disclosure Wedbush Securities does not provide tax or legal advice. Please consult your tax or legal advisor. These materials are provided for general information and educational purposes based upon publicly available information from sources believed to be reliable — we cannot assure the accuracy or completeness of these materials. The information presented is not intended to constitute an investment recommendation for, or advice to, any specific person. The information presented here is not specific to any individual’s personal circumstances. To the extent that this material concerns tax matters, it is not intended or written to be used, and cannot be used, by a taxpayer for the purpose of avoiding penalties that may be imposed by law. Each taxpayer should seek independent advice from a tax professional based on his or her individual circumstances. The information in these materials may change at any time and without notice.
Understanding the Benefits of Health Savings Accounts (HSAs) for Long-Term Financial Wellness
A health savings account (HSA) is a medical savings account that can be used in conjunction with a high deductible health insurance plan. An HSA offers a number of advantages and can be a key tool not only in planning for health care costs, but as part of your overall financial planning. What is a Health Savings Account (HSA)? An HSA is a medical savings account that can only be used in conjunction with a high deductible health plan as defined by the IRS. Many employers who offer high deductible plans will also offer an HSA option to their employees. Those who are self-employed can also open an HSA as long as they have a high deductible health plan. One thing that makes an HSA unique is the fact that money contributed to an HSA can be carried forward from year-to-year if it is not used to cover eligible healthcare costs in the current year. This differs from an FSA which is another popular type of medical savings account, where the money must be used in the current year or it will be lost to the account holder. Tax Advantages of HSAs HSAs offer a number of tax advantages. Contributions to an HSA are made on a pre-tax basis just like a traditional 401(k). Money grows tax-free inside of the HSA. Money can be withdrawn tax-free to cover the cost of eligible medical expenses. Saving for Healthcare Expenses An HSA can be an excellent way to save for health care costs in a tax-efficient way. A key benefit is the ability to carry over the balance in the HSA for use in future years. This can help in a year in which you might incur high medical costs and need a source of funds to cover portions subject to a deductible or not covered by your insurance plan. This can include building a healthcare retirement nest egg. Many people use their HSA to cover out of pocket medical costs in retirement since there is no time limit on how long the HSA can be carried forward. Investment Opportunities and Growth Potential HSAs can be invested just like a 401(k) or IRA account. Your employer may offer a number of investment options for the HSA. The portability feature of HSAs that allow you to take this money with you when leaving an employer also allows you to move the investment account elsewhere if desired. There are a number of online brokers and others who offer HSA investment accounts. Strategies for Maximizing HSAs HSAs have annual contribution limits. For 2023 and 2024 these limits are: Individuals $3,850 for 2023 and $4,150 for 2024 Family coverage $7,750 for 2023 and $8,300 for 2024 Catch-up contributions of $1,000 for those who are 55 or over in both years Additionally, some employers may make contributions on employee’s behalf as well. Contributing the maximum amounts each year allows you to invest this money for future healthcare costs including in retirement. You will also receive the current year tax benefits for making the contribution as well. HSAs can be used as an additional source of retirement savings to cover eligible healthcare costs. Additionally, money in an HSA can be treated like an IRA at age 65, though withdrawals will be taxed just like a traditional IRA. Potential Drawbacks and Considerations While there are many advantages and positive features of HSAs, there are some drawbacks and things to consider as well. One is the relatively low contribution limits. Another is that you must have a high deductible health plan in order to contribute. Depending upon the plan and your situation, this could result in substantial out-of-pocket annual medical costs for you in some years. This could even negate the benefits of the HSA. Some HSA accounts may carry high fees with them. Additionally, it is important that receipts for any medical expenses for which HSA money is withdrawn have proper documentation including receipts and other paperwork. Long-Term Financial Planning and HSA Integration For those who are eligible, an HSA can play a key role in your long-term financial and retirement planning. For those who are able to contribute the maximum each year and who can leave all or most of this money invested over time, the HSA can play a key role in their retirement savings and investing strategy. Medical costs can be significant in retirement. Having an HSA can help mitigate these costs in a tax-free fashion. Contact your Wedbush financial advisor to discuss how an HSA can play a key role in your overall financial plan. Disclosure Wedbush Securities does not provide tax or legal advice. Please consult your tax or legal advisor. These materials are provided for general information and educational purposes based upon publicly available information from sources believed to be reliable — we cannot assure the accuracy or completeness of these materials. The information presented is not intended to constitute an investment recommendation for, or advice to, any specific person. The information presented here is not specific to any individual’s personal circumstances. To the extent that this material concerns tax matters, it is not intended or written to be used, and cannot be used, by a taxpayer for the purpose of avoiding penalties that may be imposed by law. Each taxpayer should seek independent advice from a tax professional based on his or her individual circumstances. The information in these materials may change at any time and without notice.