Financial Planning: Creating a Road Map for your Future

Contributed by: Laurie Renchik, CFP®, MBA

Setting the stage for a comfortable retirement can start with your first paycheck and continue through every stage of life. Whether you are at the beginning of your career or well on your way to reaching financial goal milestones, one of your options along the way is to develop a relationship with a financial planner.

Why partner with a financial planner?

When you establish a relationship with a financial planner you start with a customized financial plan and pair it with ongoing investment advice. That way the plan leads investments rather than the opposite. By pairing a plan—informed by long term goals—with your investment strategy, investment decisions are based on you rather than a starting point of past performance or beating the market. 

If we could simply lay out a plan, set it on autopilot and land on time at our destination it would take all of the financial wondering and stress out of planning for the future. Life, however, is no ordinary journey from point A to point B; it is likely that unexpected turns happen at the most inopportune times. Turns like career changes or getting close to retirement are inflection points in life where your financial planner can make a big difference. 

I have found that the most successful financial planning relationships are focused on real life advice, in real time managing change as it happens. Looking forward helps allows for a more proactive approach, reducing the importance of relying on the rear view mirror for perspective. While it may be tempting to start with investments and lay out your plan later, it is not a complete solution. Without financial planning investing alone may not produce the results you are counting on. 

Here are my top three route changers that can add value in your journey with a financial planner:

1. Financial planning doesn’t mean planning for the day your health begins to fail; it means asking where do I want to be in three years? Ten years? Twenty years?

2. Steer your financial plan by making investment decisions based on your goals and current circumstances. It may be tempting to jump straight to investments. Resist the temptation for a more focused journey.

3. Tracking your progress through every stage of life is an effective accountability check and helps increase the likelihood of reaching your destination on time and prepared.

So whether you’re beginning your financial journey or nearing a big inflection point, feel free to call us and ask how we can help create a plan and map out your future to better align your investments with your goals.

Laurie Renchik, CFP®, MBA is a Partner and Senior Financial Planner at Center for Financial Planning, Inc.® In addition to working with women who are in the midst of a transition (career change, receiving an inheritance, losing a life partner, divorce or remarriage), Laurie works with clients who are planning for retirement. Laurie is a member of the Leadership Oakland Alumni Association and is a frequent contributor to Money Centered at The Center.

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The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Any opinions are those of Laurie Renchik and not necessarily those of Raymond James. There is no guarantee that these statements, opinions or forecasts provided herein will prove to be correct. Investing involves risk and you may incur a profit or loss regardless of strategy selected. Every investor's situation is unique and you should consider your investment goals, risk tolerance and time horizon before making any investment. Prior to making an investment decision, please consult with your financial advisor about your individual situation.

Life Planning: When Real Life Trumps Technical Financial Planning

Contributed by: Matthew E. Chope, CFP®

A meeting I had recently with the daughter of some long-time clients reminded me that sometimes what matters most in what we do with clients isn’t the dollars and cents and the detailed tax analysis, but what we call life planning. What am I talking about? Well let me tell you a little bit about the kind of planning we did.

The client’s daughter, a successful, single 30 year old woman, came in for a basic financial check-in after finding out that her job was being discontinued with her employer. She seemed somewhat relieved, because her job was not challenging her intellectually and she needed a change. She wanted to make sure she was making the right financial decisions, and needed some guidance on planning for her next stage of life. What she really wanted to know was if it was okay to take four to six months off from working, and what the financial implications would be on her short and long term goals. It seems that her primary objective at this point in her life was to find someone to spend her life with and to ultimately build a family, and taking the time to do this was a higher objective than saving for retirement—if she could swing it financially.

This young woman had been on the path of multi-generational financial planning for years.  Her parents had been guiding her based on their good habits, and we were able to provide some financial education before she went off to college to help build a strong base of financial knowledge and etiquette. In addition, she was able to get a solid college education and had been earning a good income, saved very well, and had lived below her means up until this point. Upon termination from her employment, she would be receiving a severance and health care for a couple of months, and had built a very comfortable nest egg in taxable, Roth and traditional IRA’s. She had a home with over 50% equity and was very flush with liquidity and confident in her financial situation.

After reviewing all the things in her financial life, we came to the conclusion together that she was in a strong enough financial position to pursue her primary objective of finding a life partner and building a family.

What’s Next?

We came up with a temporary travel budget for the next four to six months so that the sabbatical could take place and she could feel comfortable with it. She could travel abroad and around the United States, visit different places and experience new adventures; all while being creative to find someone that she could spend the rest of her life with. We talked about the things that needed to be done during her time off:

1. A Belief Statement:  Write down at the top of a blank piece of paper, “What Do I Believe.” By writing this down, capturing at this moment in time how she felt, she’d be able to return to it in the future. This will help her realize when she is close to finding her partner—does this person fit her values and belief systems. Or she can decide if it's crucial that they do or don't believe in the same things as she does.

2. 100 Thing List:  List of the 100 things she wanted to experience in life so that the money, she has spent all this time earning and saving, has some reason and goal behind it in order to be used for experiences that matter to her. Ideally we don’t just work to grow a big pot of money, but grow it and use it for life fulfillment. We want no regrets later in life. 

3. Vision Statement: Her idea of where she wanted to be in one year, three years and in ten years. Vision statements help guide current choices and offer a great reflection tool to check personal progress.

So, while we talked about some financials at this meeting, it was only enough to know that she was going to be okay to take time off from work. The majority of our time was spent on things that were not financial topics but were life planning issues—those non-financial issues that were most important to her at this point in her life. Sometimes we have to look at the big picture and go beyond money in order to dig deep into life planning issues, because how you chose to live your life and use that money in meaningful ways trumps the financial nuances or details of taxes, savings, and investing.

Matthew E. Chope, CFP ® is a Partner and Financial Planner at Center for Financial Planning, Inc.® Matt has been quoted in various investment professional newspapers and magazines. He is active in the community and his profession and helps local corporations and nonprofits in the areas of strategic planning and money and business management decisions.

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Any opinions are those of Matthew Chope and are not necessarily those of Raymond James. This case study has been provided for illustrative purposes only. Individual cases will vary. Every investor's situation is unique; prior to making an investment or withdrawal decision; please consult with your financial advisor about your individual situation. It is not known whether the client referenced in this case study approves or disapproves of Matthew Chope or the advisory services provided.

Finding the Right Asset Allocation

Contributed by: Jaclyn Jackson

Most delicious meals start with a great recipe.  A recipe tells you what ingredients are needed to make a meal and, importantly, how much of each ingredient is needed to make the meal taste good.  Just like we need to know the right mix of ingredients for a tasty meal, we also need to to know the asset allocation mix that makes our investment journey palatable.

Determining the Right Mix

Asset allocation is considered one of the most impactful factors in meeting investment goals.  It is the foundational mix of asset classes (stocks, bonds, cash, and cash alternatives) used to structure your investment plan; your investment recipe.  There are many ways to determine your asset allocation.  Asking the following questions will help:

• What are my financial goals?

• When do I need to achieve my financial goals?

• How much money will I be investing now or over time to facilitate my financial goals?

Seasoning to Taste

Now, suppose equity markets were down 20% and your portfolio was suffering.  Would you be tempted to sell your stock positions and purchase bonds instead? Figuring out an asset allocation based on goals, time horizons, and resources is essential, but means nothing if you can’t stick with it.  For certain ingredients, a recipe may instruct us to “season to taste”. In other words, some things are subjective and our feelings greatly influence whether we have a negative or positive experience.  For asset allocation, understanding your risk tolerance helps uncover personal attitudes about your investment strategy during challenging market scenarios.  It gives insight about your ability or willingness to lose some or all of your investment in exchange for greater potential returns.  When deciding our risks tolerances, we must understand: 

• The risks and rewards associated with the investment tools we use.

• How we deal with stress, loss, or unforeseen outcomes

• The risks associated with investing

Following the Recipe

When we follow a recipe closely, our meal usually turns out the way we expected.   In the same way, committing to your asset allocation increases the likelihood of meeting your investment goals.  Understanding your risks tolerances can reveal tendencies to undermine your asset allocation (i.e. selling or buying assets classes when we should not). Fortunately, there are a few strategies you can employ to help stay on track.  

• If you are risk adverse, diversifying your investments between and among asset categories can help to improve your returns for the levels of risks taken.

• If you find yourself buying or selling assets at the wrong time, routinely (annually, quarterly, or semi-annually) rebalancing your portfolio will force you to trim from the asset classes that have performed well in the past and purchase investments that have the potential to perform well in the future.

• If you find yourself chasing performance or buying investments when they are expensive, buying investments at a fixed dollar amount over a scheduled time frame, dollar cost averaging, can help you to purchase more shares of an investment when it is down relative to other assets (prices are low) and less shares when it is up relative to other assets (more expensive).  Ultimately, this can lower your average share cost over time.

Finding the right asset allocation for you is one of the most important aspects of developing your investment plan.  Luckily, getting clear about investment goals, time horizons, resources, and risks tolerances can help you mix the best recipe of asset categories to make your investment journey deliciously successful.

Jaclyn Jackson is an Investment Research Associate at Center for Financial Planning, Inc.® and an Investment Representative with Raymond James Financial Services.

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This information is not a complete summary or statement of all available data necessary for making an investmentdecision and does not constitute a recommendation. Any opinions are those of Center for Financial Planning, Inc., and are not necessarily those of RJFS or Raymond James. Every investor’s situation is unique and you should consider yourinvestment goals, risk tolerance and time horizon before making any investment or investment decision. Investing involves risk, investors may incur a profit or loss regardless of strategy or strategies employed. Asset allocation and diversification do not ensure a profit or guarantee against a loss. Dollar-cost averaging does not ensure a profit or protect against loss, investors should consider their financial ability to continue purchases through periods of low price levels.

Focusing on what you Can Control

Contributed by: Nick Defenthaler, CFP®

“Don’t stress about the stuff you can’t control, doing so will ruin the present.” Simple but powerful advice my dad gave me nearly a decade ago which has always stuck with me. Personally, I’ve always been a bit of a “worry wart.” Those words of wisdom, however, provided by my dad—that I probably already knew, but needed to hear from someone I loved and respected—have proven to dramatically reduce the things I lose sleep over because that I know deep down that I have virtually no control over them. As I had to remind myself of this recently, it made me think of a graphic J.P. Morgan put together that we often times share with clients:

Often times, the major area that we as investors become fixated on (and rightfully so!) are market returns. Ironically, this is an area, as the chart shows, we have no control over. The same goes for policies surrounding taxation, savings and benefits. As you can see, employment and longevity are things we do have some control over, by investing in our own human capital and our health. The areas that we have total control over—saving vs. spending, and asset allocation and location—are what we need to focus on, in my opinion. Consistent and prudent saving, living within (or ideally, below) your means, and maintaining a proper mix of stocks and bonds within your portfolio are what we try to have clients be laser focused on. Over the course of 31 years of helping clients achieve their financial goals, The Center has come to realize that those two areas are the largest contributors of a successful financial plan. 

With so many uncertainties in the world we live in today that can impact the market, it’s always a timely reminder to focus on the areas that we have control over and make sure we get those things right.  Chances are, if we do, the other things that we might be stressing over today, will potentially fall into place. If you need help focusing on the areas of your financial wellbeing in which you CAN control, give us a call! We’re always happy to help.

Nick Defenthaler, CFP® is a CERTIFIED FINANCIAL PLANNER™ at Center for Financial Planning, Inc.® Nick is a member of The Center’s financial planning department and also works closely with Center clients. In addition, Nick is a frequent contributor to the firm’s blogs.

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Opinions expressed are those of Nick Defenthaler, and are not necessarily those of Raymond James. Investing involves risk and investors may incur a profit or a loss regardless of the strategy or strategies employed. Asset allocation does not ensure a profit or guarantee against loss.

Three’s a Party! The Center Welcomes New Team Members

Contributed by: Lauren Adams, CFA®, MBA

When we mentioned that we were looking for great people to hire back in July, little did we know what an exceptional pool of client service talent would come our way! In the last month we brought on not one, not two, but THREE new members of the client service team. Let me give you a quick introduction to these service-oriented rock stars, and make sure you say hi to them the next time you call or stop by the office to meet the newest members of The Center Family!

Emily Lucido came to us from the banking industry where she worked her way up from a part-time float teller to the loan department of a local bank. Emily holds a degree in finance and dazzled us during the interview process by explaining how she made a saving/spending calculator for her friends and family in her spare time. We’re excited for Emily to bring her love of finance (and arts and crafts), attention to detail, and friendly attitude to the Client Service Associate position.

Jeanette LoPiccolo joins us after spending nine years as a Registered Client Associate at a large financial services firm. During this time, Jeanette earned her Series 7 and 66 licenses, among others, and was regularly recognized for outstanding client service. Fun fact about Jeanette: she found her way into financial planning after being recruited by an advisor who noticed her exceptional customer service as branch manager of a credit union. We’re thrilled for Jeanette to bring her impressive experience and ability to “surprise and delight clients” to the Client Service Manager position!

Ashley Frank, our newest Client Service Associate, recently moved to Michigan and found The Center after several years of experience in financial services in her home state of Ohio where she earned her Series 6 license, among other designations. Ashley is eager to meet and build relationships with clients of The Center, and we need to do our best to welcome her to Michigan in style (so bring on the suggestions of which Coney Island or type of Faygo pop she must try!). In her spare time, Ashley enjoys volleyball and has been a youth volleyball coach in the past.

Please join me in giving a warm welcome to Emily, Jeanette, and Ashley! We are so thrilled to have them become a part of our team, and we know you’ll love meeting them soon too.

Lauren Adams, CFA®, MBA is Director of Client Services at Center for Financial Planning, Inc.®

Back to School – It’s Not Just for Kids

Contributed by: Sandra Adams, CFP®, CeFT™

So it’s that time of year again…with the end of summer brings the excitement of the new school year and new learning for the kids! As an adult, haven’t you ever been just a little bit envious of that “back to school” rush kids experience? Jealous of the excitement of new learnings and of the prospect of engaging your mind? What if you had time to do this when you retired AND found out that it might make help you age more successfully?

According to the UCLA Longevity Center (Fall/Winter 2015 Newsletter), lifelong learning for older adults can be as effective as a college education in protecting brain health as you age. Since Alzheimer’s disease is the 6th leading cause of death in the United States according to the 2016 Alzheimer’s Report, brain health is something we should probably put pretty high on our priority list!

Locally, we have a wonderful resource to find lifelong learning opportunities – SOAR (Society of Active Retirees – www.soarexlore.com).  SOAR is a community-based, lifelong learning initiative affiliated with Wayne State University and the Road Scholar Institute Network. It is a member-run and member-driven organization that offers a broad range of non-credit courses and related activities that provide multiple opportunities for social and cultural enrichment as well as personal growth. SOAR draws from volunteer faculty, largely from WSU and other area colleges and universities. In addition to SOAR, we have a vast array of wonderful community education programs and community colleges that provide programs ripe with opportunities for older adults. 

In addition to protecting brain health, lifelong learning can add to successful aging by:

• Keeping you mentally and socially active

• Adding joy to your active retirement years

• Adding additional knowledge and wisdom to your life

• Being a financial“efficient” retirement activity

Successful aging takes many forms, and it isn’t always about being financially successful. It is about staying healthy…physically, mentally, psychologically…in all ways possible. Staying active is part of the game. For more information about how you can stay active for successful aging, don’t hesitate to contact me.

Sandra Adams, CFP® , CeFT™ is a Partner and Financial Planner at Center for Financial Planning, Inc.® Sandy specializes in Elder Care Financial Planning and is a frequent speaker on related topics. In addition to her frequent contributions to Money Centered, she is regularly quoted in national media publications such as The Wall Street Journal, Research Magazine and Journal of Financial Planning.

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This information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Raymond James is not affiliated with the Society of Active Retirees organization, Wayne State University, or the Road Scholar Institute Network.

Millennials Matter: To Rent or to Buy?

Contributed by: Melissa Parkins, CFP®

The infamous question – should I continue to rent or should I buy a house? The answer – it completely depends! The right answer for you will depend on a number of factors:

• How long you plan on living in the same location

• The prices of rent compared to buying in your location

• Costs such as maintenance and repairs, insurance, property taxes

• The inflation rate that rent will rise

See Matt’s blog for more considerations and details when contemplating buying a home. It is one of the largest financial decisions you will make in your life, and there are a lot of common misconceptions to also consider before pulling the trigger:

• Paying rent is the equivalent of throwing away money.

  • Either way, you have to pay to live somewhere, because of the way amortization schedules work, only a small portion of your monthly mortgage payments go towards building equity in your home (even smaller than you probably think!). Most of your monthly payments are going towards paying the bank interest, which can also be seen as throwing away money. Some say you are better off renting unless you plan on being in the home more than 5 years because of this reason. Plus there are added costs that come up when you own a home, like property taxes, insurance, maintenance, and repairs.

• You’re getting married. Time to buy a house together.

  • Give yourself time to get settled, decide on a location together, do you research, and especially, learn to manage your finances together before you jump right in to buying a home. There are enough changes going on at this point in your life, so don’t be in a rush to get in a house just because you think it is what you are expected to do next. Take the time to find a home you love that is in your price range and meets all of your other requirements. That being said, my fiancé and I bought our house together right before getting married, and it (hopefully?!) was the right decision for us.

• The real estate market is only getting more expensive. You must buy now.

  • You should really wait until the time is right for you, and not just buy because of the market. Do you have an adequate emergency fund saved? Have you saved to cover the down payment without depleting your emergency fund? Do you have other debts that should be paid off first? All of these factors should be worked out before you try and buy a home. When the time is finally right for you to buy, don’t fret…there will still be houses on the market!

• Buying a house is a good investment.

  • It takes years to build equity in a home. The market must cooperate. You will undoubtedly have costs coming up that detract from your “return.” Your primary home should not be looked at as an investment only.

So if you are looking to be a first-time homebuyer: take a step back, don’t be in a rush, and consider all of the factors. It is important to be sure that you are financially ready to buy a home, and if not, continuing to rent may be the best option for you for more reasons than one.

Melissa Parkins, CFP® is an Associate Financial Planner at Center for Financial Planning, Inc.®

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The foregoing information has been obtained from sources considered to be reliable, but we do not guarantee that it is accurate or complete. Opinions expressed are those of Melissa Parkins and are not necessarily those of Raymond James. Raymond James Financial Services, Inc. does not provide advice on mortgage issues. These matters should be discussed with the appropriate professional.

Webinar in Review: Employee Benefit Open Enrollment

Contributed by: Clare Lilek

Each September, as school is back in session and fall is right around the corner, the last thing on your mind is “How can I make the most of my employee benefit enrollment that’s happening soon?!” It may not be the most exciting topic, but enrollment for your employer’s benefit package happens once a year, usually in late September and early October, and can affect the benefits and coverage you receive for the following twelve months. So it is very much worth your time to look at what your company offers and weigh the pros and cons of all your options. Luckily for you, Nick Defenthaler, CFP®, recently hosted a webinar that outlines the various benefits your company could offer and how you may go about electing certain packages. Below are a few highlights from the 30-minute webinar. For a more detailed explanation, watch the full webinar recording below!

Retirement Savings Plans

• Choosing a Traditional (pre-tax) or a Roth (post-tax) plan depends on your current tax bracket versus your projected tax bracket when you retire.

• Make sure you are always maxing out your employer match at the very least. In order to make sure you are continually growing your retirement account, consider add 1-2% each year to your contributions.

• Choose a mix of investment options that are aligned with your risk tolerance.

• Ride out the changes in the market. It’s important not to make constant portfolio changes.

Executive Compensation Plans

These types of compensation plans are typically used as incentive compensation. They can vary from company to company but some of the options include: stock options, non-qualified deferred compensation plans, and employee stock purchase plans. We are currently doing a blog series on Stock Options (NSOs, ISOs, and RSUs); make sure to look out for these for a more detailed overview.

Health Insurance

Nick did a high-level overview of the different types of plans and options you may encounter when it comes to company health insurance. When choosing between a PPO or HMO, you could be choosing between the flexibility of additional benefits (PPO) or the lower cost for potentially more restrictive benefits (HMO). He also highlights the importance of reading the fine print when adding a spouse to your benefits. Lately, many companies have a spousal surcharge that makes it more expensive for a spouse to be insured on your plan if they have access to insurance through their own employer. Nick also noted that some companies are making the move to high-deductible plans, which lower their premiums but put the “buying power” back in the hands of the insured.

Flex Spending Accounts

Nick continued to describe the potential benefit of using a Flex Spending Accounts, whether it’s for medical or dependent care deductibles.  When pretax contributions are used for qualified medical expenses, within the year of contribution, they continue to go untaxed. To learn how you could potentially save some tax money, make sure to tune in to this part of the webinar!

Other Insurances

To wrap up, Nick went through disability insurance and life insurance options. He weighed the pros and cons for group vs individual coverage, and how some employees might want to consider long-term and short-term disability coverage.

If you have any questions about this webinar or your specific benefits, don’t hesitate to reach out to Nick.

529 Plans: Saving for your Child’s Education

Contributed by: Nick Defenthaler, CFP®

Doesn’t it always seem like you blink and summer is over? For some reason, this glorious season seems to go by especially fast when you live in the state of Michigan! Hopefully you all took advantage of the hot and sunny weather and had a chance to explore all of the great things our state has to offer with your family. 

If you have children, your focus has probably shifted from weekend getaways to getting back into a more structured routine now that school is back in session.  Since school is top of mind for many, I felt it was a good time to touch on education planning and saving for college. 

Below is a brief refresher of the 529 plan, a popular type of account you can save into for future college expenses.  Many people refer to the 529 plan as the “education IRA” but there are some caveats:

Advantages:

• State tax deduction on contributions up to certain annual limits

• Tax-deferred growth

• No taxation upon withdrawal if funds are used for qualified educational expenses (such as tuition, books, room and board, computers, etc.)

• Parents have control over the account and can transfer the account to another child

• Not subject to kiddie tax rules, unlike UGMA accounts (Uniform Gift of Minors Act) and UTMA accounts (Uniform Transfer to Minors Act)

Disadvantages:

• No guaranteed rate of return – subject to market risk

• Certain taxes and penalties will apply if funds are withdrawn for non-qualified expenses

Items to be aware of:

• Keep records of how money was spent that was withdrawn from the 529 account in case of an audit

• Review the asset allocation/risk profile of the account on an annual basis – typically, the closer the child is to entering college, the more conservative the account should become 

Just like saving for retirement, the sooner you can start saving for college the better. With that being said, if your children are only a few years out from college and your savings isn’t where you’d like it to be, there is still hope. Chances are you still have options and this is where good financial planning can come into play. There are also nuances with financial aid and completing the FAFSA that you want to be aware of—check out our webinar on the topic! If we could provide guidance in this area, don’t hesitate to reach out, we would be happy to help!

Nick Defenthaler, CFP® is a CERTIFIED FINANCIAL PLANNER™ at Center for Financial Planning, Inc.® Nick is a member of The Center’s financial planning department and also works closely with Center clients. In addition, Nick is a frequent contributor to the firm’s blogs.

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The foregoing information has been obtained from sources considered to be reliable, but we do not guarantee that it is accurate or complete, it is not a statement of all available data necessary for making an investment decision, and it does not constitute a recommendation. Any opinions are those of Nick Defenthaler and are not necessarily those of Raymond James. As with other investments, there are generally fees and expenses associated with participation in a 529 plan. There is also a risk that these plans may lose money or not perform well enough to cover college costs as anticipated. Most states offer their own 529 programs, which may provide advantages and benefits exclusively for their residents. The tax implications can vary significantly from state to state. Asset allocation does not ensure a profit or guarantee against loss.

401(k) for Solo Business Owners

Contributed by: Matt Trujillo, CFP®

If you're self-employed or own a small business, you've probably considered establishing a retirement plan. If you've done your homework, you likely know about simplified employee pensions (SEPs) and savings incentive match plans for employees (SIMPLE) IRA plans. These plans typically appeal to small business owners because they're relatively straightforward and inexpensive to administer. What you may not know is that in many cases an individual 401(k) plan (which is also known by other names such as a solo 401(k) plan, an employer-only 401(k) plan, or a single participant 401(k) plan) may offer a better combination of benefits.

What is an individual 401(k) plan?

An individual 401(k) plan is a regular 401(k) plan combined with a profit-sharing plan. Unlike a regular 401(k) plan, however, an individual 401(k) plan can be implemented only by self-employed individuals or small business owners who have no other full-time employees (an exception applies if your full-time employee is your spouse). If you have full-time employees age 21 or older (other than your spouse) or part-time employees who work more than 1,000 hours a year, you will typically have to include them in any plan you set up, so adopting an individual 401(k) plan will not be a viable option.

What makes an individual 401(k) plan attractive?

One feature that makes an individual 401(k) plan an attractive retirement savings vehicle is that in most cases your allowable contribution to an individual 401(k) plan will be as large as or larger than you could make under most other types of retirement plans. With an individual 401(k) plan you can elect to defer up to $18,000 of your compensation to the plan for 2016 (plus catch-up contributions of up to $6,000 if you're age 50 or older), just as you could with any 401(k) plan. In addition, as with a traditional profit-sharing plan, your business can make a maximum tax-deductible contribution to the plan of up to 25% of your compensation (up to $265,000 in 2016).  Since your 401(k) elective deferrals don't count toward the 25% limit, you, as an owner-employee, can defer the maximum amount of compensation under the 401(k) plan, and still contribute up to 25% of total compensation to the profit-sharing plan on your own behalf. Total plan contributions for 2016 cannot, however, exceed the lesser of $53,000 (plus any catch-up contributions) or 100% of your compensation.

For example, Dan is 35 years old and the sole owner of an incorporated business. His compensation in 2016 is $100,000. Dan sets up an individual 401(k) plan for his retirement. Under current tax law, Dan's plan account can accept a tax-deductible business contribution of $25,000 (25% of $100,000), plus a 401(k) elective deferral of $18,000. As a result, total plan contributions on Dan's behalf can reach $43,000, which falls within Dan's contribution limit of $53,000 (the lesser of $53,000 or 100% of his compensation). These contribution possibilities aren't unique to individual 401(k) plans; any business establishing a regular 401(k) plan and a profit-sharing plan could make similar contributions. But individual 401(k) plans are simpler to administer than other types of retirement plans. Since they cover only a self-employed individual or business owner and his or her spouse, individual 401(k) plans aren't subject to the often burdensome and complicated administrative rules and discrimination testing that are generally required for regular 401(k) and profit-sharing plans.

Other Advantages of an Individual 401(k) Plan

Large potential annual contributions and straightforward administrative requirements are appealing, but individual 401(k) plans also have advantages that are shared by many other types of retirement plans:

An individual 401(k) is a tax-deferred retirement plan, so you pay no income tax on plan contributions or earnings (if any) until you withdraw money from the plan. And, your business's contribution to the plan is tax deductible.

• You can, if your plan document permits, designate all or part of your elective deferrals as after-tax Roth 401(k) contributions. While Roth contributions don't provide an immediate tax savings, qualified distributions from your Roth account are entirely free from federal income tax.
• Contributions to an individual 401(k) plan are completely discretionary. You should always try to contribute as much as possible, but you have the option of reducing or even suspending plan contributions if necessary.
• An individual 401(k) plan can allow loans and may allow hardship withdrawals if necessary.
• An individual 401(k) plan can accept rollovers of funds from another retirement savings vehicle, such as an IRA, a SEP plan, or a previous employer's 401(k) plan.

Disadvantages

Despite its attractive features, an individual 401(k) plan is not the right option for everyone. Here are a few potential drawbacks:

• An individual 401(k) plan, like a regular 401(k) plan, must follow certain requirements under the Internal Revenue Code. Although these requirements are much simpler than they would be for a regular 401(k) plan with multiple participants, there is still a cost associated with establishing and administering an individual 401(k) plan.
• Your individual 401(k) plan assets are fully protected from your creditors under federal law if you declare bankruptcy. However, since an individual 401(k) plan generally isn't subject to ERISA, whether your plan's assets will be protected from your creditors outside of bankruptcy will be determined by the laws of your particular state.
• Self-employed individuals and small business owners with significant compensation can already contribute a maximum $53,000 by using a traditional profit-sharing plan or SEP plan. An individual 401(k) plan will not allow contributions to be made above this limit (an exception exists for catch-up contributions that can be made by individuals age 50 or older).

If you think an Individual 401(k) might be the right vehicle for you, we encourage you to contact your financial planner to work through your individual situation to make the right choice for you.  Feel free to reach out to us if you think we can be of help!

Matthew Trujillo, CFP®, is a Certified Financial Planner™ at Center for Financial Planning, Inc.® Matt currently assists Center planners and clients, and is a contributor to Money Centered.

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This information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Any opinions are those of Matthew Trujillo and are not necessarily those of Raymond James. Prior to making a retirement plan decision, please consult with your financial advisor about your individual situation. Roth account owners must be 59½ or older and have held the IRA for five years before tax-free withdrawals are permitted. While we are familiar with the tax provisions of the issues presented herein, as Financial Advisors of RJFS, we are not qualified to render advice on tax or legal matters. You should discuss tax or legal matters with the appropriate professional.