As a Small Business owner, does a SEP make sense?
By Ken Mahoney

A SEP is a Simplified Employee Pension retirement plan for self-employed individuals and small businesses. A SEP allows a self-employed person to contribute towards retirement or allows a small business owner to contribute towards employee retirement plans.

Eligible participants include:
• A self-employed person
• Employee of a small business who has reached the age of 21
• A self-employed person who has worked for you at least 3 of the last 5 years
• An employee of a small business who has worked for you at least 3 of the last 5 years
• A self-employed person who has received at least $450 in compensation for the year
• An employee of a small business who has received at least $450.00 in compensation for the year

Contribution maximums
Just like there are maximum contribution limitations set for IRAs, there are contribution maximums for SEPs also. Self-employed individuals or employees of a small business who are covered by a SEP can contribute 25% of their net self-employment earnings or $45,000, whichever of the two figures is lower.

Advantages of a SEP
There are several advantages for having a SEP retirement plan, which include:
• Investment earnings grow tax-deferred until distribution
• Easy to set up and operate
• You are not locked into making contributions every year
• Sole proprietors, partnerships, C and S corporations, and LLCs can establish a SEP
• Administrative costs are low

Many employers offer matching contributions to employee retirement plans. If your employer does this, try to contribute whatever the employer is willing to match—even if it is only a percentage of your contribution and not a dollar for dollar match. Essentially, this is free money to you and can significantly impact how much money you have at the time of retirement.

For example, Zoe Zoerson contributes $1,000 per year into her retirement account. Her employer matches her contributions dollar for dollar, so her employer also contributes $1,000 per year to her retirement account. Zoe is able to deduct her contribution amount from her taxes, not having to pay tax on it. Furthermore, Zoe’s $1,000 contribution and her employer’s $1,000 are invested in her account and grow as time goes by. Zoe does not have to pay income tax on the interest, dividends, capital gains, or the appreciation of her retirement account investments until she begins to withdraw the money when she turns 70½.

Matching contributions are common for 401k, 403b, and 457 plans. Sometimes the employer is only willing to make a partial match to your contributions, but you should still take advantage of this opportunity. Even if the employer contributes 50 cents for every dollar you contribute, up to the first 6 percent of your salary, it is worth it. This is free money that will compound and grow. Einstein said, “The most powerful force in the universe is compound interest.”

How to help your 401k beat volatility by Ken Mahoney

While there is no surefire formula for protecting the investments in your 401(k), there are some things you can do to help your 401(k) survive when the market is on a rollercoaster cycle.

First, keep a close eye on how the current investments in your 401(k) are performing. By paying attention to what is happening in your portfolio, you can research, diversify, and re-balance your investments to create growth - even in a volatile market.

When the market is down, as we have witnessed recently, it is an opportune time to take advantage of rebalancing and diversifying your portfolio. Rebalancing is a way of changing the allocations of the funds in your portfolio to meet your original goals. For example, if your portfolio was fifty percent stocks and fifty percent bonds but the stock market was very volatile you might rebalance your portfolio to be eighty percent bonds and twenty percent stocks. Not only will you want to consider the allocation of these types of investments you will also want to consider the allocation with in a type of investment. How well are growth versus value stocks, large cap versus midcap versus small cap stocks allocated in your portfolio? To rebalance, you will need to sell enough of the investments that are above your original goal and buy enough of the investments that are below your original goal.

While it is important to look at the investments in your portfolio, it is also important to review the investment options available. Research the track record of each investment and decide which one(s) fit your risk tolerance and investment style. Visit www.stockcharts.com to view historical stock market charts that plot the progress of the stock market for the last few decades. Overall, those who invest in the stock market see long-term growth, but that doesn’t mean you don’t have to pay attention to what is going on with your investments.

Of course all of this may have you confused if you have a 401(k) administrator who manages your account. The administrator is a fiduciary that is responsible for watching and adjusting the investment options offered to you and other 401(k) holders. You, however, can choose from the investment options offered to create your own portfolio. This is why it is important for you to pay attention to how your investments are performing, so you can make changes and adjustments when necessary.
And remember to continue to contribute to your 401(k). Because you plan to use these monies in your retirement remember each contributed dollar reduces your taxable income. And try to ensure that your contributions are in line with your investment goals.

Last but not least seek out the assistance of your plan’s administrator, your personal financial advisor or the website for your plan. Their knowledge and your own research will help you keep a handle on protecting your portfolio during both stable and unstable times.