Financial planners and tax advisors tend to shy away from simple blanket statements. They’re far more comfortable using highly-detailed, multi-faceted statements that, while accurate, nonetheless lose something in the telling due to, ironically enough, their completeness.
It’s understandable. After all, the arena in which financial planning and taxation come together is far too complicated and way too pernsickety to not lose something when going from the highly specific and technical to the general purpose and lay.
Nonetheless, here goes:
If you are self-employed and have zero employees, then
you should set up an individual 401k plan before the end of the year.
This sort of retirement plan — also called a “solo 401k plan” or “self-employed 401k plan” and recently, in an apparent attempt to give them that Jobsian glow, sometimes even called a “i401k plan” — is the bees’ knees for folks who work for themselves and have zero employees, so setting one of these up is just about always a good idea in that situation.
And why are these things so great? The answer is many-fold, but the first two folds are (1) because in most self-employment situations you can sock a lot more money away in these plans than in most other plans you might set up, and (2) because these plans can have both tax-deferred and tax-paid contributions (aka “traditional” and “Roth”). Explaining both of those characteristics would take some doing, so I’ll leave the explanation to another day/another conversation. For now please just take it on faith that the first characteristic is all about arithmetic and how more tax benefit is better than less tax benefit, while the second characteristic is all about you having a very nice choice to make whenever you put money into your plan.
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Do It Before the End of the Year.
The blanket statement above also talks about setting your plan up before the end of the year. This is because, even though you’re free to never put any money into your plan if it turns out that that’s the way you want to go (you can treat it as something sitting on the financial health shelf, so to speak, waiting to be used if and when the situation is right), and although even if you do decide you want to put money into your plan, you don’t need to put that money in until very much later in the following year — often as late as September or October of the following year for folks using various tax filing extensions — it’s also true that if you want your plan to be able to impact your tax situation for the current year, then the plan itself has to be in existence no later than 11:59:59 pm on New Year’s Eve of the current year.
Aside about time-of-day conventions: I might even go so far as to say you need to get it into existence at midnight of that day, but which midnight? The one at the start of New Year’s Eve or the one at the end? It’s just a bit prone to ambiguity, isn’t it? And that’s why, in the persnickety world of finance, “midnight” just about never exists. It is, for instance, a foreign concept in insurance contracts, which, in a classic application of the drafting rule that says, if the word can be construed to mean two different things, use a different word, always refer to the start of coverage in terms of “12:01 a.m.” on a given day.
So for these things to be effective for this year, they need to exist — if only as an empty shell — before we are all living in the now-foreign but soon-enough-to-be-commonplace space-time thing called next year.
But why wait until the last moment?
If you answer that question in your head by thinking, “um, because I’m human?” I hear you, believe me, I hear you. But try being just a skoshe better than human for this task, and, instead, getting your plan set up now; that way you won’t ever find yourself rushing to meet the deadline. Plus, you can, if you like, put some money in there now and have that contribution be effective for the current tax year.
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Setting Your Plan Up is Easy.
Setting one of these things up is a tad more complicated than setting up a plain vanilla IRA — it’s a somewhat longer form — but it’s also much, Much, MUCH simpler than setting up a group 401k plan (setting up a group 401k plan is like a totally different universe in terms of complexity).
Usually you can set one of these up via a fifteen-minute phone call with a customer service rep for the investing platform you want to use — most of them offer these sorts of plans — during which you do some form filling-out, followed by you getting the form submitted to the platform.
This is important: when filling out any form for a financial services company, have a customer service representative take you through every single line — every single line — in real-time, and then when you’ve done that, go through it with the rep again quickly, making sure you got it all right. Doing so significantly increases the odds of having the form accepted the first time, rather than having it get kicked back to you for being NGO — which stands for not in good order. Yes, that is the parlance.
And if you’re a caring soul, not wishing to put people out, then know that the rep and the platform actually appreciate you asking them to do this because they far prefer taking that half hour and gathering your assets quickly over having to NGO you, which delays their gathering of your assets and is time-consuming and therefore rather expensive for them to boot.
And if you get NGO’ed on, say, 12/30/20xx, the odds are high that you are not going to get this thing established in time to be effective for the 20xx tax year (it’ll be good for the 20xx+1 tax year instead). And it’s always nice to keep your options open.
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Links to Three Places that Can Help You set Up Your Individual 401k Plan, and Two Places that Can Help You Further Smarten Up
To just name and then point to three obvious candidates for where you might want to set one of these up, here is Vanguard’s page for this sort of plan:
Full URL: https://investor.vanguard.com/what-we-offer/small-business/individual-401k?Link=facet
Shortened URL: http://is.gd/QykUDE
And here is Fidelity’s:
Full URL: https://www.fidelity.com/retirement-ira/small-business/self-employed-401k/overview
Shortened URL: http://is.gd/RSN8Zg
And here’s Schwab’s (a small dollop of opprobrium on Schwab for having such a long URL):
If you have one of those platforms in your life and are happy with it, use that one. And if you do not, then go with Vanguard, OK? I’m on record for thinking that most people should have Vanguard in their lives.
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So, please, if you’re self-employed and have zero employees, go git it. You can do it, and the odds are quite high that you’ll be favorably impressed with what this new place for putting your hard-saved money can do.
And much financial health to you, and a great 20xx and 20xx+n to you too.