Ira, Sep, 401(k) -- Oh, My!

By DiAnne Crown

December 14, 2011 6 min read

In 1972, Ken Kuchar founded Ken's Appliance Service and joined the ranks of the self-employed. By 2006, Kuchar was 58; he and his wife had reared four children, and the business was providing a living for his family and employees. But there had not been much money to set aside for retirement. "I never had anything built up," Kuchar says. "Raising a family takes most of your money."

So Kuchar contacted Joe Kula, certified financial planner now with Cornerstone Wealth Consultants. "We wanted to do something for our employees. They're dedicated and work hard for us," Kuchar says.

Kula helped the Kuchars set up a SIMPLE, or Savings Incentive Match Plan for Employees, individual retirement account, in which everyone, including new employees, participates. "We'll match up to 3 percent of whatever the employee puts in," Kuchar says. Everybody benefits. Income taxes are deferred on all investments within federal limits of the plan, Kuchar pays no administration fees, each employee controls his own investment account, and, says Kula, there is 100 percent vesting immediately -- which means employees still own their accounts even if they leave the company.

It's a good fit for a small business. "There was never a pension plan for us," says Kuchar. "Nobody ever helps us self-employed people out." He adds that with the SIMPLE IRA, he not only wanted to show his appreciation for his employees but also hoped to get them started on a savings plan while they were young. "You don't want to get on late in life when you don't have any money to do anything and have to rely on Social Security."

Forensic pathologist Travis Hindman, another Kula client, retired about four years ago. He and his wife are living on income generated by their Simplified Employee Pension IRA, and the account is growing, says Hindman. "Our investment performance is meeting or exceeding all of the indices. We're taking out a fair amount of money monthly to live on year to year, getting by very nicely, and yet the portfolio excels the requirement."

The simple, flexible SEP was a good match for Hindman, who is self-employed with no eligible employees. And, says Kula, should anyone need a tax deduction, the SEP is "the only plan that can be established after the end of the tax year, up to the due date of filing the tax return, including extensions. All other qualified plans are required to be established during the plan year."

The Hindmans meet with Kula quarterly to discuss their portfolio, and Travis Hindman recommends that all investment owners do the same in order to take an active role in understanding and monitoring their accounts.

"I would heartily recommend the principle of getting together quarterly to talk face-to-face with your financial officer," he says. "We haven't needed to change but, believe me, if (Kula) felt it was necessary to change the allocation, we would." Nevertheless, Hindman emphasizes, "When you have an expert managing your money, don't micromanage the manager."

When Kula meets with a prospective client, he asks several questions to determine the right investment. "Different types of plans offer different benefits, depending on what the client is looking for," Kula says. "Depending on your highest priority, you choose your plan."

In addition, consider the costs and flexibility of the plan. To enjoy maximum tax benefits, for example, a third-party plan administrator may be required by law, which will increase costs. Defined-benefits, SEP and 401(k) plans may appeal to people with high profits who want to shelter more of their income, explains Kula.

He advises creating a flexible investment program that will accommodate both conservative employees and more aggressive investors while providing education for all participants, adding, "A disciplined and diversified investment plan that rebalances makes for a successful investment strategy."

Kula advocates a holistic approach to financial planning, concentrating on three key areas: wealth accumulation, risk management and income planning.

Retirement plan options include traditional and Roth IRAs, as well as employer-sponsored plans such as the SEP, SIMPLE and defined-benefits plan. Each offers different benefits relative to taxes, contribution levels, administration costs, age of the participants and more.

Kula offers two more suggestions to investors. First, follow this old adage faithfully: Pay yourself first. Don't make your plan to invest whenever you have some money left over in the checking account, he says. Make a monthly contribution to a savings account of some kind -- whether you're starting out and need to build up the emergency fund or want to make substantial contributions to shelter large amounts of income.

Finally, look at your portfolio in time segments. "No one likes to see their accounts go down, but it can be more comforting to think about your portfolio in time segments when markets are doing poorly," says Kula.

To do this, create a pool of money that won't get tapped for emergencies, such as a car breakdown or health problem; an intermediate time segment with more aggressive investments that will be used for whatever might happen up to five years from now and can replenish the emergency fund as needed over the next two to ten years; and a long-term segment for use 10 or more years from now, during retirement.

"That long-term segment is going to go up and down over time, but historic 10-year periods normally show positive results," Kula says.

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