Thursday, April 28, 2011

Q&A Series - SEP-IRAs

This week's question comes from Jason, a client who is self-employed and is looking into ways to save for retirement.

Q: Yikes! I’ll be 40-years old this year and am self-employed, but I don’t have any retirement savings. Where do I begin?

Don’t beat yourself up, Jason. While it’s always best to start saving for retirement sooner rather than later, 40 is still young (it’s the new 25, right?) and you have many years ahead of you to build a nice retirement nest egg. Hooray for you for jumping in the game!

The Basics

For self-employed individuals and small business owners with few or no employees, the easiest plan to administer – and the one we will focus on in this post – is a Simplified Employee Pension Plan (“SEP”). Any self-employed individual or employer can establish a SEP, and there are no required tax filings. SEPs must be initially established and contributed to by the tax filing deadline, plus extensions.

There are a few other choices available – Individual 401(k) Plans or Savings Incentive Match PLan for Employees (SIMPLE IRAs) – but for your one-man show, a SEP may be your best bet.

SEP Contributions, Tax Advantages, and Withdrawals

Contributions are made to SEP-IRAs established for each employee by employers (or by and for the self-employed individual), and vesting is 100% immediate. Using a somewhat intricate calculation, employers can contribute up to 25% of an employee’s net annual compensation (20% for self-employed individuals), or a maximum of $49,000 for each tax year 2010 and 2011, whichever is less. SEP-IRAs are flexible in that the contribution amounts can vary from year-to-year and it’s not required that they be funded annually.

If you have employees and contribute to a SEP-IRA for yourself, it’s important to keep in mind that you must also make equivalent (percentage-wise) contributions for all eligible employees, including those whose employment terminated during the year. Eligible employees must be at least 21-years old, must have worked for the employer in at least three of the last five years, and must have received at least $550 in compensation from the employer for the year in 2010 and 2011 (subsequent years will be subject to annual cost-of-living adjustments).

Also advantageous is that SEP-IRAs work just like traditional IRAs, meaning that contributions are tax-deductible and the investment earnings grow tax-deferred until withdrawn. Also similar to a traditional IRA, you can start withdrawing the money penalty-free at age 59½; withdrawals before age 59½ come with a 10% penalty (some exceptions apply). But, bear in mind that if you don’t start taking the full Required Minimum Distribution (RMD) withdrawals by age 70½, you will be subject to a 50% penalty.

Another tax advantage of SEP-IRAs to participants over age 70½ is that they may continue to fund the maximum allowable amount each year, potentially providing for a sizable tax deduction. There are no other retirement plans available that allow individuals who have an ownership interest in a business to continue making contributions after age 70½. This also means that employers must continue making contributions for employees over age 70½. Of course, such participants must be mindful to take the RMD each year.

One disadvantage of a SEP compared to a 401(k) plan is that there are no typical catch-up provisions for participants who are age 50 or older; SEP-IRA participants are only entitled to the same catch-up provisions as traditional or Roth IRAs. For 401(k) plans allowing catch-up contributions, participants who are at least 50-years old are permitted to contribute an additional $5,500 in catch-up contributions for 2010 and 2011. In contrast, for 2010 and later years, the catch-up IRA contribution amount for individuals age 50 and older is $1,000, but that would be in addition to the maximum allowable SEP-IRA contribution amount for the year.

How to Increase Retirement Potential

In your case, Jason, using an anticipated retirement age of 65, you should consider contributing the maximum allowable amount each year to be properly prepared for living off your retirement savings for approximately 30 years. That might sound like a hefty order, but it’s a necessary commitment to ensuring your retirement years are as comfortable and financially stress-free as possible.

If you can save above the limits of your SEP-IRA, and depending upon what you might qualify for and what makes the most sense for you from a tax standpoint, you also might want to explore making maximum total annual contributions of $5,000 to either a Roth IRA or a traditional IRA (or a combination of the two). For those of you over age 50, the maximum contribution that can be made to a traditional or Roth IRA is $6,000. There are income limitations to consider, so it’s best to speak with a tax advisor to determine your best plan of action. Of course, opening a taxable brokerage account is another way to potentially increase your retirement savings even more.

Thanks for your question, Jason. I hope my explanation has given you some understanding of SEP-IRAs and some other items for you to consider in your quest to start planning for retirement. While you have some catch-up work to do, if you commit to contributing the maximum amount you can afford each year, I think you’ll be better positioned for smooth sailing when the time comes.

We encourage our clients and readers to send us questions for our Q&A series at And as always, we hope you will keep Rollins Financial in mind when seeking professional advice on financial planning and investing.

Best regards,
Joe Rollins

Thursday, April 21, 2011

End of Tax Season/Good Friday Holiday Announcement

As most of you know, the office of Rollins Financial also houses a sister CPA firm, Rollins & Associates, P.C. With the April 18th tax filing deadline behind us, Rollins & Associates will begin focusing on preparing income tax returns for our clients who filed extensions. If you require assistance with preparing an income tax return for an extension you filed, please let us know.

In the meantime, to provide our staff with a much needed day of rest and relaxation, our office will be closed on Friday, April 22nd. Please note that all major U.S. stock exchanges will also be closed due to the Good Friday holiday.

If you require immediate assistance on Friday, please contact Joe Rollins at 404.372.2861 or Our office will re-open for business on Monday, April 25th at 8:30 a.m.

We will be resuming our Q&A Series next week. If you have questions regarding investing or financial planning, please send them our way.

Best regards,
Rollins Financial, Inc.

Wednesday, April 6, 2011

Our New Look

With great excitement, we proudly unveil our new logo design. Our new logo signifies the solid path Rollins Financial takes with our clients in the management of their assets for a sound financial life.

We have also been striving hard to embrace the ever-evolving technology available to the investment advisory world and simplify our processes, and in that regard, we have also shortened our company name from Rollins Financial Counseling to Rollins Financial. Please let us know what you think of our new look.

Additionally, we are in the process of redesigning the Rollins Financial website. When the website re-launches, it will incorporate our new logo and expand our commitment to bridging our clients with access to their accounts maintained at Fidelity Investments or Charles Schwab & Company. The new website will also be more integrated with the Rollins Financial Blog.

As always, your satisfaction with our services is our utmost concern. We welcome your comments regarding our new design, and if you have any suggestions to help us with the redevelopment of our website, please email us at