Daily Archive: December 15, 2017

Dec
15

Trump closes in on landmark US tax reform

Rubio and Corker back bill after move to win over wavering Republican lawmakers

Dec
15

Philip Hammond opens London forex markets to China banks

Initiative part of chancellor’s trip to Beijing to build trade relationship

Dec
15

7 Things You Need to Know About a Simple IRA

Most people have never heard of a SIMPLE IRA and are curious to know how it differs from a 401(k).

A SIMPLE IRA stands for Savings Investment Match Plan for Employees.

Getting started with a SIMPLE IRA:

7 Things You Should Know About the SIMPLE IRA.
Setting Up a SIMPLE IRA and Maintaining Filing Requirements
Where Can I Open a SIMPLE IRA?

One of the key differences of why your employer may offer a SIMPLE IRA versus a 401(k), is that SIMPLE IRAs are geared for employers with less than a 100 employees.

In addition to that, the administrative cost of a SIMPLE IRA for your employer is considerably much less than what a 401(k) would be.

These are the common reasons why you might see an employer offering a SIMPLE IRA versus a 401(k).

7 Things You Should Know About the SIMPLE IRA

1.  Your Employers Contributions are 100% Vested.

With most 401(k)s you must work for the employer for a certain number of years to be vested.  This means if you were to leave that employer you could take that employer’s matching contribution with you.  But with the 401(k) you have anywhere from three to five years before you’ve satisfied the 401(k) vesting schedule, which is different with SIMPLE IRA.

With the SIMPLE IRA, you are 100% vested whenever the employer deposits that into your account.

This is definitely a huge difference than the 401(k). Both you and any employees you have enjoy immediate vesting, not only of your own contributions to the plan, but also of matching contributions on the employer side.

2. Employers Have To Match in a SIMPLE IRA

Each year, the employer is required to make a contribution to your SIMPLE IRA account whether it be in the form of a match or what’s called a non-elected contribution.  Matching contribution states that the employer has to match at least what you match.  So, if you’re matching 3%, the employer has to match 3% as well.  Note that 3% is the most that the employer has to match, which could be considerably different than compared to a 401(k).

The employer does have the option to reduce the matching amount to 1% for two of a five year period.  What that means is that if the employer does do this, that they have to match the full 3% for the remaining three of those five years.  The calculation can be a little tricky, but know that your employer is matching no matter what.

If the employer chooses to not match, they may do a “non-elect contribution”. That means they will contribute 2% of your salary.  Even if you are contributing 3% of your salary, they will only contribute the 2%.

3. Employees Control the Investments

With most 401(k)s, you are limited to the investment options that your employer provides you.  This is considerably different when compared to the SIMPLE IRA.  Being a self employed retirement plan, the SIMPLE IRA gives you the discretion of what exactly you want your money invested into.  If you want to buy individual stocks, mutual funds, ETFs, or CDs, you are allowed.  This is the same feature that a SEP IRA offers.

The investment control factor plays out in two ways:

1. Employee choice of investment trustee. You can designate the plan so that the employee chooses his or her own financial institution to hold the plan. That not only gives greater choice to the employees, but it also relieves you, as the employer, of the burden of managing the entire plan for everyone.

2. Self-directed investing. Participants not only choose the financial institution, but they are also free to engage in do-it-yourself investing. That means they can choose how the money is invested, where it’s invested, as well as the level of risk that they are willing to assume.

4. Employees can contribute 100% of income into a SIMPLE IRA.

You are allowed to contribute up to $12,500 (2017 and 2018) per year in a SIMPLE IRA.  If you’re over the age of 50, you’re allowed a catch-up contribution, which is 3,000.  Please note that the $12,500 (or $15,500) is far less than the $18,000 (or $24,000) that you are eligible to contribute to a 401k.

The Simple IRA contribution limit amount is now $12,500 per year with the additional catch up of $3,000. Nor is it as high as the (up to) $54,000 that you could contribute to either a SEP IRA or a Solo 401(k).

But the SIMPLE IRA contribution limit of $18,500 is more than three times as high as the $5,500 contribution limit for a traditional or Roth IRA. And the contribution limit of $15,500 for people 50 or older is almost 2 ½ times higher than the $6,500 limit for traditional and Roth IRAs.

The 100% feature of the SIMPLE IRA means that the employee can contribute virtually all of their income to the plan, up to the maximum contribution. That means that if an employee earns $30,000, they can contribute the first $12,500 of their income into the plan. There is no percentage limitation on the contribution, only the dollar amount.

Yes, it’s true that you can contribute more to other plans, like the SEP IRA or the Solo 401(k). But your business will have to have a relatively high income to reach those levels, since both are percentage based. But if your self-employment income is less than $100,000 per year, you might find the simplicity of the SIMPLE IRA to be the better choice for your business.

For example, SIMPLE IRAs don’t require filing special reports with the IRS. They also aren’t subject to discrimination and top-heavy testing. It’s more of a group IRA than anything else. And for a small business, simple is a definite advantage.

5. SIMPLE IRA’s Do Not Allow Loans

A lot of 401(k)s have loan provisions that allow the employee to borrow against their money if need be.  With SIMPLE IRAs, this is not the case.  Keep that in mind if you’re thinking that this might be a last resort place to draw money out.

The reason this is true is because a SIMPLE IRA is first and foremost an IRA. And just as you cannot borrow money from a traditional or a Roth IRA, you also can’t borrow from a SIMPLE IRA. That’s probably not a bad thing either. The most important function of any retirement plan is giving you the ability to create a tax-sheltered investment portfolio for your retirement. Since you won’t be able to borrow against a SIMPLE IRA, you’ll be forced to keep the plan for its primary intended purpose.

6. The SIMPLE IRA Two-year Rule.

This is something that should be definitely noted within the SIMPLE IRA.  Most retirement plans — 401(k)s, regular IRAs, or Roth IRAs, etc. — have the 10% early withdrawal penalty if under the age of 59.5.  But with the SIMPLE IRA, it takes it one step further.

If the SIMPLE IRA that you’ve started is less than two years and you cash it out, instead of the normal 10% penalty, you will be subject to a 25% penalty in addition to ordinary income tax.

Do not overlook this.  Keep in mind that doesn’t apply to just cashing it out.  If you were attempting to rollover your SIMPLE IRA into a rollover IRA, the 25% penalty would apply as well.  Remember to just wait the two years before converting into either a regular IRA or cashing it out.

7. 2018 Contributions Have Increased

Just in case you missed in number 4, the contributions limits have increased for 2018.  The increase in 2017 and 2018 will be from $18,000 to $18,500.   The catch up contribution has increase from $2,500 to $3,000.  That means that for somebody that turns 50 in the year 2018 and has access to a Simple IRA can contribute a total of $15,500.

Setting Up a SIMPLE IRA and Maintaining Filing Requirements

Setting up a SIMPLE IRA is only a little bit more complicated than setting up a traditional or Roth IRA. You start by selecting a financial institution (which we’ll cover below), and then following three steps:

Execute a written agreement to provide benefits to all eligible employees
Give employees certain information about the agreement
Set up an IRA account for each employee

The written agreement can be completed using IRS Form 5304-SIMPLE or IRS Form 5305-SIMPLE. (5304 is used if each participant will choose their own financial institution. A 5305 is used if you will designate the financial institution for the entire plan).

Neither form is required to be filed with the IRS, but you should keep a completed copy of the form on file, including all relevant signatures. You could also use a pro forma provided by the financial institution that you will be using to hold the plan. It will accomplish the same purpose.

You’ll need to provide an annual notice to eligible employees at the beginning of the election period (or provide each with a copy of either the completed 5304 or 5305 form). That will notify each employee of the following:

The employee’s opportunity to make or change a salary reduction choice under the SIMPLE IRA plan;
The employees’ ability to select a financial institution that will serve as trustee of the employees’ SIMPLE IRA, if applicable;
Your decision to make either matching contributions or nonelective contributions;
A summary description (the financial institution should provide this information); and
Written notice that the employee can transfer his or her balance without cost or penalty if you are using a designated financial institution.

The plan must be set up by or for each eligible employee, and all contributions to the plan must go into it. The plan must be established between January 1 through October 1 of the year. Unfortunately, a SIMPLE IRA cannot have a Roth provision, as would be possible with a 401(k) plan.

Where Can I Open a SIMPLE IRA?

A SIMPLE IRA can be opened through a wide number of potential trustees. These can include banks, investment brokerage firms, mutual fund families, and managed investment account brokers. The process is easy, and comparable to opening up either a traditional or a Roth IRA.

For whatever reason, there are fewer investment brokerage firms that accept SIMPLE IRA plans, than other types of IRAs, like traditional, Roth, rollover, and even SEP plans. Below are four investment brokers that we have reviewed (or use), and recommend as a trustee for your plan.

Scottrade

Scottrade is an online investment broker that I’ve been using for a few years. I think they’re one of the best all-around brokerage platforms available. They have excellent trading tools, as well as educational resources for investors at all levels of expertise.

As a discount investment brokerage platform, Scottrade enables you to trade in all kinds of investments – stocks, bonds, mutual funds, exchange traded funds (ETFs), and options. They have outstanding customer service, and at $6.95 per trade, they’re at about the middle of the industry.

One fact to be aware of however is that Scottrade was recently purchased by TD Ameritrade. While Scottrade continues to function as an independent investment brokerage, there’s always the possibility that will be rolled over into TD Ameritrade.

Which isn’t entirely a bad thing, since that’s the next recommendation.

TD Ameritrade

We’ve done a full review of TD Ameritrade and recommend it as a good trustee for a SIMPLE IRA plan. They don’t have the lowest trading fees in the industry ($9.99 per trade), but they have a strong IRA capability in general. They’re a diversified broker, offering stocks, options, mutual funds, ETF’s, futures, Forex, bonds and even certificates of deposit.

Not only do they have excellent customer service, but they also have more than 100 branches located nationwide, in case you prefer face-to-face contact. They also have a Retirement Calculator tool, that analyzes your personal information, goals, income, assets, and risk tolerance, and then shows you how to reach your goals, as well as track your progress.

They also offer more than 100 ETF’s that you can trade for free. All around, TD Ameritrade is an excellent platform to host a SIMPLE IRA plan, or any other type of IRA account.

E*TRADE

We’ve also reviewed E*TRADE, and in doing so we’ve rated it as the best investment platform for active traders. The platform offers free independent research, streaming real-time quotes, customizable planning tools everything that you need for do-it-yourself investing.

At $7.99 per trade, they’re in the middle range on industry pricing. But they also offer more than 2,700 no-load, no transaction fee mutual funds. And since they offer virtually every other type of investment or retirement plan, you can use E*TRADE to hold all of your accounts with one brokerage.

E*TRADE is well recognized in regard customer service, which can be reached by phone 24 hours a day. They also offer as much or as little account assistance as you need. And if you want a fully managed account, E*TRADE offers that through their E*TRADE Capital Management arm. That will even enable you to have your SIMPLE IRA plan split between a self-directed portion, and a professionally managed portion.

OptionsHouse

OptionsHouse is an excellent choice if you prefer do-it-yourself investing. It’s a fully diversified investment brokerage platform, offering all investment vehicles, but including and especially options trading.

OptionsHouse has no minimum account balance requirement, which can make it perfect for brand-new plans. At $4.95 per trade, its commissions are near the very low end of the fee structure. Despite the “options” in the name, you can also invest in more passive assets. OptionHouse enables you to invest in thousands of mutual funds and ETF’s.

If you’re considering opening a SIMPLE IRA, and you should if you’re evaluating self-employed retirement plans, check out any one of these for brokers to host the plan for you.

The post 7 Things You Need to Know About a Simple IRA appeared first on Good Financial Cents.

Dec
15

UK households under most financial strain in 5 years

Proportion with high levels of mortgage debt compared with income has increased

Dec
15

Household finances are worse since Brexit vote, says Bank of England

Study of over 6,000 households found an increase in people reporting high mortgage debt, repayment costs and rents

Almost a decade of improvements in household finances has started to be unpicked in the year since the EU referendum, according to the Bank of England.

Findings from a biannual study for Threadneedle Street of more than 6,000 UK households found an increase in people reporting high mortgage debt when considering their income, while there were also worrying increases in repayments and in costs for renters.

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