Will, who is single and under age 50, is employed as a full-time tax accountant

Question

Will, who is single and under age 50, is employed as a full-time tax accountant at a local manufacturing company where he earns $60,000 per year. He participates in a pension plan through his employer. Will also operates a small tax practice in his spare time during tax season and has net Schedule C income of $8,000. He is interested in establishing and contributing to other retirement plans. What options are available to Will?

I'm not sure what differentiates the different options. I don't know what would make one option available to Will and not another.

Explanation / Answer

The Social Security Administration (SSA) recently announced a couple of changes designed to reduce its costs and increase the use of the online tools and information available at the SSA’s web site (www.ssa.gov). Both of the changes noted below are expected to help the SSA save more than $190 million each year. The changes include the following: • Suspension of the annual Social Security Benefits statements: Each year, the SSA sends out a Social Security Statement to each person, which includes their earnings history and an estimate of the retirement, disability and survivors benefits that they and their family are expected to receive (based on the earnings in the statement). Statements are sent out about three months before a person’s birthday each year. As of last month, the SSA suspended those mailings to everyone for the remainder of this year. The SSA expects to resume the mailings in 2012 to those who are 60 or older. For those who are younger than 60, you can still request a copy of your benefits statement but they will not be automatically sent out each year. In addition, the SSA is working on options for people to download or access their benefit statements online. In the meantime, you can still use the SSA’s Benefit’s Estimator (http://www.socialsecurity.gov/pubs/10510.html) to help you estimate your social security retirement benefits. The information from these statements - regardless of how to receive it - can be valuable in your financial planning or retirement planning process for a couple of reasons. First, it will provide you with an estimate of the retirement, disability, and survivor benefits that you are likely to receive. Secondly, it provides you with the earnings history that the SSA uses to calculate your benefits. It’s important to check (and correct, if necessary) your earnings history to ensure that you receive the benefits you are entitled to. • Switching from paper checks to electronic payments: Those who are applying for Social Security benefits on or after May 1, 2011 will receive their benefits checks electronically (through Direct Deposit or Direct Express). Those who are receiving benefits prior to May 1, 2011 can continue to receive paper checks but will need to switch to one of the electronic methods noted above by March 1, 2013. For more information about the SSA’s electronic payment methods I have a SEP IRA from when I was self-employed. I now work for another employer that has a 401(k) plan. Can I continue to make contributions to my SEP IRA if I am no longer self-employed? A SEP IRA is a type of employee pension plan that allows employers to make contributions towards their employee’s retirement as well as their own retirement (if they are self-employed). If you are no longer self-employed and earning income from that business, you will not be able to continue to make contributions to that SEP IRA because contributions are based on earnings from that business. If the SEP IRA is no longer active, you generally have a couple of options including keeping the SEP IRA account as is (and not making any additional contributions) or terminating the SEP IRA plan and rolling your account over to an IRA. If you choose to terminate the plan, you can do so by contacting the financial institution that administers your plan. Although it is not required, you should let your former employees (if you had any) know that you will not be making any additional contributions and that the plan will be discontinued. You do not need to contact the IRS to let them know that you are terminating the plan. As more employers shift away from offering defined benefit plans to defined contribution plans (such as 401(k) and 403(b) plans), employers are trying to provide employees with a wide menu of products to choose from. In part, this is to ensure that employees with various personal financial situations have the ability to select investments that best fits their particular needs. While this flexibility is generally a good thing, it does come with a price. In addition to understanding the fees associated with the administration of the overall plan, employees must also understand the fees and expenses for the individual investment products. To further complicate matters, each plan administrator and investment product may have different fees and different ways of charging those fees. Under the current Employee Retirement Income Security Act (ERISA), employers are required to follow certain rules about the administration of 401(k) plans including the plan’s fees and expenses. However, the rules do not specifically dictate what the fees are and how they are charged. The responsibility for determining the fees paid are left to the employer and the employee (through the investments he/she chooses). According to the US Department of Labor (DOL), fees and expenses associated with a 401(k) plan can generally be grouped into the following three categories: 1) Plan administration fees: These are fees paid for the daily management of the plan including record keeping, accounting, legal, educational seminars, etc.; 2) Investment fees: These are fees associated with the specific investment. For mutual funds this may include transaction costs, loads, sales charges, 12b-1 fees, management fees and commissions. For annuities this may include wrap fees, surrender or transfer charges, insurance-related charges, etc.; and 3) Individual service fees: These are fees for optional services that a plan participant chooses. For example, a participant may be charged an administration fee associated with taking a loan from his/her 401(k) account. As the responsibility for building a retirement nest egg continues to shift from employers to employees, understanding the impact of fees and expenses on your 401(k) account is critical. In October 2010, the DOL issued new rules that should make it easier for employers and employees to understand the fees that are associated with their 401(k) plan. Starting on January 2012 employers will need to provide more transparent information about the fees associated with their 401(k) plans and the investments offered by their plan. The new rules require employers and plan administrators to provide more detailed, user-friendly information about two main areas including: * Plan-related information such as administrative expenses and the fees and expenses deducted from individual plan participant’s account, and * Investment-related information for each investment such as performance data, benchmark information, and expense and fee information. Regardless of these new rules the DOL recommends that you review your fees though your account statements, investment documents (e.g., prospectuses), and the various plan documents (such as the summary plan description and the Form 5500) available from your employer or plan administrator. In addition to holding Social Security and Social Security Income benefits flat for 2011, the lack of an automatic COLA increase also prevents other amounts from increasing. For example, the maximum amount of earnings that are subject to Social Security taxes for 2011 will remain at the current 2010 amount of $106,800 dollars. Also, the retirement earnings test exempt amounts for 2011 remain unchanged. If you will not reach your Normal Retirement Age (NRA) anytime during 2011, you can year $14,160 dollars before your Social Security benefits are reduced. If you will reach your NRA during 2011, you can earn $37, 680 dollars for the months in 2011 prior to reaching your NRA, before your Social Security benefits are reduced.

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