Atlantic Capital Management

Atlantic Capital Management (81)

Thursday, 22 December 2016 20:50

Is a SIMPLE IRA Right for Your Business?

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A look at this easy-to-administer retirement program.

Do you want a simple retirement plan? A plan you can implement easily as an independent contractor or small business owner, without a lot of paperwork? A SIMPLE IRA may be the answer.

A SIMPLE IRA plan gives you a tax break, while giving you and your employees a way to build retirement savings. True to its name, it requires no annual filing of Form 5500 with the IRS, which is typical for many other types of small business retirement plans. SIMPLE IRA plans are often set up using IRS Forms 5304-SIMPLE or 5305-SIMPLE.1

If you work solo, a SIMPLE plan could really help your retirement saving effort. Frustrated at the annual ceiling on Roth or traditional IRA contributions that lets you save only a few thousand dollars a year? Well, you can direct up to $12,500 per year into a SIMPLE IRA, $15,500 if you are 50 or older.1

SIMPLE IRA contributions are made with pre-tax dollars, so they are 100% deductible. Just like other IRAs, a SIMPLE IRA allows tax-deferred growth of invested assets.2

How does a SIMPLE IRA plan work when you have employees? Each one of your employees gets their own IRA as part of the plan, with the same high annual contribution limits noted above. As an employer, you must contribute to their IRAs each year in one of two ways (and you must inform them which approach you will take for the coming calendar year):

*You can elect to match their contributions, dollar-for-dollar, to a limit of 3% of their annual salaries. (If you like, you can set this limit as low as 1%, but you can only lower the limit from the standard 3% in two years out of any five-year period.) 1,2

*Or, you can just make a non-elective contribution of 2% of each employee’s salary to each employee’s plan. If you choose this option, you must make these 2% contributions whether or not the employee makes any plan contributions.1,2

Employee contributions to a SIMPLE IRA are always 100% vested, and employees are free to make their own investment decisions. As the accounts are IRAs, the money saved and invested may be held in a variety of investment vehicles offered by particular plan vendors.1

What does an employee have to do to be eligible for the plan? Each employee must meet two simple compensation tests. One, will that employee receive at least $5,000 in compensation from your business this year? Two, did he or she receive $5,000 or more in compensation from your business during any of the two prior years? If both those tests are met, that employee can participate in a SIMPLE IRA plan.1

Do SIMPLE IRAs have any shortcomings? Yes, they do; no small business retirement plan is perfect. An employer must always make contributions to a SIMPLE IRA, year-in and year-out. Plan participant loans are also prohibited from SIMPLE IRAs, which is not the case with many other retirement plan accounts. That said, there is much more to like about SIMPLE IRAs than there is to dislike.2

Why not make things SIMPLE? Look into a SIMPLE IRA plan for your business, your employees, and yourself. Sole proprietorships, partnerships, and corporations all have them – for great reasons.

This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note - investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

Citations.
1 - irs.gov/retirement-plans/plan-participant-employee/who-can-participate-in-a-simple-ira-plan [3/15/16]
2 - irs.gov/retirement-plans/choosing-a-retirement-plan-simple-ira-plan [7/28/16]

Thursday, 15 December 2016 15:10

Mind Over Money

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Emotion often drives our financial decisions, even when logic should.

When we go to the grocery store, we seldom shop on logic alone. We may not even buy on price. We buy one type of yogurt over another because of brand loyalty, or because one brand has more appealing packaging than another. We buy five bananas because they are on sale for 29 cents this week – the bargain is right there; why not seize the opportunity? We pick up that gourmet ice cream that everyone gets – if everyone buys it, it must be a winner.

As casual and arbitrary as these decisions may be, they are remarkably like the decisions many investors make in the financial markets.

A degree of emotion also factors into many of our financial choices. There is even a discipline devoted to how our emotions affect our financial decisions: behavioral finance. Examples of emotionally driven financial behaviors are all around us, especially in the investment markets.

Behavior #1: Believing future performance relates to past performance. In truth, there is no relation. If an investment yields 8-10% for six consecutive years, that does not mean it will yield 8-10% next year. Still, we may be lulled into expecting such performance – how can you go wrong with such a “rock solid” investment? In behavioral finance, this is called recency bias. Bullish investors tend to harbor it, and it may lead to irrational exuberance.1

Similarly, investors adjust risk tolerance in light of past performance. If their portfolio returned spectacularly last year, they may be tempted to accept more risk this year. If they took major losses in the equity markets last year, they may become very risk-averse and get out of equities. Both behaviors assume the future will be like the past, when the future is really unknown.1

Behavior #2: Investing on familiarity. Familiarity bias encourages you to make investment or consumer choices that are “friendly” and comfortable to you, even when they may be illogical. You go with what you know, without investigating what you don’t know or looking at other options. Another example of familiarity bias is when you invest in a company or a sector largely because you are attracted to or familiar with its “story” – its history, its reputation.2

Behavior #3: Ignoring negative trends. This is known as the ostrich effect. We can ignore the reality of a correction or a bear market; we can ignore the fact that our credit card debt is increasing. Studies suggest that investors check in on their portfolios with less frequency during market slumps – they would rather not know the degree of damage.3

Behavior #4: Wanting decisions to pay off now. Patience tends to be a virtue in both equity investing and real estate investing, but we may suffer from hyperbolic discounting – a bias in which we want a quick payoff today rather than an even larger one that might result someday if we buy and hold.3

Behavior #5: Falling for a decoy. When given a third consumer choice, instead of two consumer choices, we may choose a different product than we originally would, and perhaps make a choice we would not have otherwise considered. Once, an ad in The Economist offered three kinds of subscriptions: $59 for online only, $159 for print only, and $159 for online + print. The $159 print-only option was an illustration of the decoy effect – the choice existed seemingly just to make the $159 online + print option look like a better deal.3

Behavior #6: Seeing patterns where none exist. This is called the clustering illusion. You see it in casinos where a slot machine pays out twice an hour, and people line up to play that “lucky” machine, which has, in fact, just paid out randomly. Some investors fall prey to it in the markets.3

Behavior #7: Following the herd. The more consumers or investors that subscribe to a particular belief, the greater the chance of other consumers or investors to join the herd, or “jump on the bandwagon,” for good or bad. This is the bandwagon effect.3

Behavior #8: Buying the amount of something that we are marketed. In our minds, we believe that there is an optimal amount of something per purchase. This is called unit bias, and when marketing suggests the ideal amount should be larger, we buy more of that product or service.3

There are dozens of biases we may harbor, temporarily or regularly, all subjects of study in the discipline of behavioral finance. Recognizing them may help us to become a better consumer, and even a better investor.

This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note - investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

Citations.
1 - marketwatch.com/story/a-financial-plan-to-help-you-simplify-and-succeed-2016-09-23 [9/23/16]
2 - abcnews.go.com/Business/stock-stories-fairy-tales/story?id=42529959 [10/3/16]
3 - businessinsider.com/cognitive-biases-2015-10 [10/29/15]

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