Self-Directed Retirement Plans

When the US Congress passed the Employee Retirement Income Security Act (ERISA) in 1974 establishing the Traditional IRA account forty years ago, it sensed that many Americans needed an additional vehicle to incent personal retirement savings. The obvious advantages of deferring taxes on the contributions and earnings until retirement age were to encourage its citizens to augment company pensions, social security and other personal savings.

The success of these accounts would likely stagger the legislators that passed the original measure – as more than $5 trillion is now held in IRAs, recently surpassing all the assets of 401(k) holdings. As more and more tax deductions and credits are being eliminated, there is little doubt that contributions and roll-overs to IRAs will only accelerate.

Since the first Traditional IRA was opened in 1975, self-directed retirement investments have been an option for the informed investor. Now NuView makes that same opportunity available to holders of SEP IRAs (1978), SIMPLE IRAs (1996), Roth IRAs (1997), as well as Health Savings Accounts (2004) and Coverdale Education Savings Accounts (2002).

Many clients ask us what is suitable for them. We always suggest you speak with your tax advisor about which is best for you, but here is a brief description of the different accounts:


Traditional IRA

The original IRA, is the basic account that holds the vast majority of IRA assets. As long as you have a social security number, earned income and are younger than 70.5 years old, you likely are eligible to open and contribute to your Traditional IRA.

For most account holders, the contributions are made from pre-tax dollars and earnings grow without taxation until withdrawal. For those with higher incomes and covered by an employer retirement plan, the contribution to the Traditional IRA may not be deductible, but earnings on the account will not be taxed until distribution.

The traditional IRA can, at the client’s discretion, be later converted, all, or in part, to a Roth IRA.

Maximum Contribution – 2014 Dollar for dollar up to $5,500
Over age 50 Additional $1,000
Contribution Deadline April 15th of following year
Eligibility Any earned income
Contribution Deductibility May be reduced if you or spouse is in an employer sponsored plan
Required Minimum Distributions? Yes, beginning at age 70.5
Penalties for Early Withdrawal 10% of amount withdrawn before the age of 59.5
Tax on Distribution? Yes, ordinary income tax

Roth IRA

In 1998, in a bill sponsored by Senator Roth of Delaware, the Roth IRA was born, once again to encourage more retirement savings. The interesting wrinkle is that unlike the Traditional IRA, the contributions are taxed, and the distributions are not. Similarly to the Traditional IRA, the earnings while in a Roth IRA accrue without taxation.

This choice can be attractive to those who believe that their tax rates may not be significantly lower in their retirement years than they are when the contributions are being made. This retirement account comes with two other advantages – no minimum distributions at age 70.5, as you will owe no taxes, and if you choose to withdraw your contributions before age 59.5, you can do so without taxes and penalties (note that there is a 10% penalty and ordinary income taxes on earnings withdrawn early).

In order to withdraw all the funds without taxes and penalties, the Roth IRA accountholder must have achieved the age of 59.5 and have had the account opened and funded for five years.

Many Traditional, SEP and SIMPLE IRA holders are choosing to convert their accounts either partially or wholly to Roth IRAs since as of 2010, this option is available to all accountholders regardless of earnings.

Maximum Contribution – 2014 Dollar for dollar up to $5,500
Over age 50 Additional $1,000
Contribution Deadline April 15th of following year
Eligibility Based on amount of earned income and tax filing status
Contribution Deductibility None
Required Minimum Distributions? None
Penalties for Early Withdrawal None for contributions, earnings subject to 10% before the age of 59.5
Tax on Distribution? No, if held for at least 5 years and account holder is over age 59.5

SEP IRA

The Simplified Employee Pension IRA is a company sponsored plan that requires the employer, not the employee to make all contributions. All contributions are pre-tax, and the company must treat all eligible employees equally in the percentage of earnings that is contributed. For example, if you as the business owner want the company to contribute 25% of your $100,000 salary to your SEP IRA, the company will also have to contribute 25% of all your employee company earnings also.

Sole proprietorships, partnerships and corporations are all eligible, but the SEP IRA is usually the choice of entities of business owners/partners with few, if any employees. While contribution limits for a SEP IRA are much higher, once the contributions are made, the rules of early withdrawals and required minimum distributions are the same as a traditional IRA.

Maximum Contribution – 2014 25% of eligible earnings up to $51,000
Over age 50 No Additional
Contribution Deadline April 15th of following year plus extensions
Eligibility Self-employed or business entity
Contribution Deductibility Yes, to company
Required Minimum Distributions? Yes, beginning at age 70.5
Penalties for Early Withdrawal 10% of amount withdrawn before the age of 59.5
Tax on Distribution? Yes

SIMPLE IRA

The Savings Incentive Match Plan for Employees is another employer sponsored plan, eligible for employers with 1 – 99 employees. Unlike a SEP IRA, the principal contributor to a SIMPLE plan is the employee, with the employer required to offer a matching contribution, normally 3% percent of the employees compensation, or 2% of each employee’s compensation without regard to the employee’s contribution to the plan.

This plan can be an attractive substitute to a 401(k) plan for employers with less than 100 employees, as administrative costs are negligible, and each employee participant is responsible for their choice of custodian and investments. While the contribution limits are lower than a SEP plan, the SIMPLE plan incents the employee to take an active role in retirement saving by making the company match. However the company is not required to make a contribution on behalf of an employee who chooses not to contribute to their IRA.

Like a SEP IRA, the contributions are pre-tax, and similar to a Traditional IRA, required minimum distributions and penalties for early withdrawals apply. There is a unique requirement, however with a SIMPLE IRA that the contributions and earnings must not be withdrawn earlier than two years from the date it was established or a significant 25% penalty will be applied, plus applicable ordinary income tax, of course.

Maximum Contribution – 2014 dollar for dollar of eligible earnings
up to $12,000 plus employer match to up to 3%
Over age 50 $2,500 Additional
Contribution Deadline April 15th of following year plus extensions
Eligibility Employee of business or sole proprietorship
Contribution Deductibility Yes
Required Minimum Distributions? Yes, beginning at age 70.5
Penalties for Early Withdrawal 10% of amount withdrawn before the age of 59.5
Tax on Distribution? Yes

The Individual 401(k) Plan

A true hybrid, the I401(k) plan can be a very attractive option for the solo practitioner or businesses with multiple owners who work in the business and have no common law employees. This plan permits both the employee to elect to contribute and the employer to make a profit sharing contribution, and provides several other important benefits.

These advantages include the ability to accelerate contributions, the election for the participant to contribute either on a pre-tax or post tax (Roth-like) basis without income restrictions, take a loan from the plan (50% of assets up to $50,000), and not be subject to Unrelated Debt Financed Income (UDFI) tax when making a profit on leveraged real estate transactions.

Maximum Contribution – 2014 dollar for dollar of eligible earnings
to $17,500 plus profit share up to total of $52,000
Over age 50 $5,500 Additional
Contribution Deadline April 15th of following year plus extensions
Eligibility Business with no employees other than owners
Contribution Deductibility Yes, unless designated as post-tax (Roth like)
Required Minimum Distributions? Yes, beginning at age 70.5 except for post tax contributions
Penalties for Early Withdrawal 10% of amount withdrawn before the age of 59.5
Tax on Distribution? Yes, for pre-tax portion only

Coverdale Savings Plan

A Coverdell Education Savings Account (ESA) is an account created as an incentive to help parents and students save for educational expenses. The total contributions for the beneficiary of this account cannot be more than $2,000 in any year, no matter how many accounts have been established. A beneficiary is someone who is under age 18 or is a special needs beneficiary.

Contributions to a Coverdell ESA are not deductible, but amounts deposited in the savings account grow tax free until distributed. The beneficiary will not owe tax on the distributions if they are less than a beneficiary’s qualified education expenses at an eligible institution. This benefit applies to qualified higher education expenses as well as to qualified elementary and secondary education expenses.


Health Savings Plan

Health Savings Accounts (HSAs) were created in 2003 so that individuals covered by high-deductible health plans could receive tax-preferred treatment of money saved for medical expenses. Generally, an adult who is covered by a high-deductible health plan (and has no other first-dollar coverage) may establish an HSA.

For 2014, individual contributions are maximized at $3,300, and contributions for an individual holding a family high-deductable policy can contribute up to $6,550. Funds in these accounts are pre-tax, and can be utilized for qualified medical expenses without taxation. No required minimum distributions are mandated by the HSA, permitting these funds to grow throughout the holder’s lifetime.