Before the housing bubble burst in 2008, you could find high yield savings accounts that were paying rates over 5.0 percent. Today? These same banks are paying less than .10 percent.
So where are you supposed to put your money? Is there anywhere else you can put your hard-earned cash and generate a modest return? Here are several suggestions.
Social Lending. Consider a social lending site like LendingClub, a peer-to-peer loan network that allows you to invest in other people’s loans. Typical rates that you can earn range between seven and 20 percent. There is a required initial deposit of at least $1,000.
Risks: Social lending is not for the faint of heart. You are acting as a bank and have to be prepared to take loan losses…just like a bank.
Brokerage Accounts. Brokerage accounts often have a number of options to earn ongoing interest higher than most banks. It includes investing in dividend-bearing stocks, bonds, and other CDs. Many of these options will provide higher savings yields than banks, but you need to know the risks of your options before you invest.
Risks: Each product offered within your brokerage account will have its own risks. For instance, dividend stock returns are not guaranteed and underlying shares can lose value. So never invest in something you don’t understand. The good news is many investment savings alternatives are insured by the FDIC and SIPC.
High Yield Savings Accounts. High yield accounts don’t have very high interest rates. But an account earning .4% to .7% is better than nothing. For a balance of $30,000, this yields about $200 annually. These types of accounts can be found at both online and brick-and-mortar banks and typically pay a better rate than traditional savings and checking accounts.
Risks: Only choose well-respected, well-managed institutions when selecting an online account. And as always, be especially careful to take security precautions when moving funds online. Also double check to ensure your funds are FDIC insured.
The low rate environment is being influenced by the vast spending of the federal government. So until the fed moves rates up, you are going to need to stay vigilant to try to keep your hard-earned savings rates above the rate of inflation.
As an owner of a small business, you’ve proven that you’re a self-starter by operating a successful private enterprise. Of equal importance is applying your skills towards saving for your future. Here are some of the most popular tax-advantaged retirement vehicles for small business owners in 2020 and some tips on saving for retirement.
Options if you’re not currently enrolled in a plan
For small business owners not currently enrolled in a retirement plan, here are three of the most popular retirement account options:
Simplified Employee Pension (SEP) IRA Account. Contribute as much as 25% of your business’s net profit up to $57,000 for 2020.
401(k) Plan. Contribute up to $57,000 of your salary and/or your business’s net profit.
Savings Incentive Match Plan for Employees (SIMPLE) IRA Account. You can put all your business’s net profit in the plan, up to $13,500 plus an additional $3,000 if you’re 50 or older.
Which plan should you choose? SEP and SIMPLE IRAs are ideal for either sole proprietors or really small businesses (no more than one or two dozen employees). Due to higher administrative costs, 401(k) plans are usually more suited for larger small businesses (more than one or two dozen employees).
Tips to maximize your retirement contributions
For small business owners who are currently enrolled in a retirement plan, here are some suggestions for maximizing your annual contributions into your retirement accounts:
Pay yourself first. Instead of funding your retirement account with whatever is left over after paying your monthly bills, decide at the beginning of each month how much you want to set aside to fund your retirement. Make funding your retirement each month as important as your other bills. Then assume that you pay your retirement bill first. If you run out of money before paying all your bills, decide if there are any expenses that can be pared back for subsequent months so you can meet your monthly retirement savings goal.
List your retirement contributions on your income statement. It is easy to forget about retirement planning when running the day-to-day operations of your business. To keep retirement contributions top-of-mind, record these as a separate line item on your business’s income statement.
Review your tax situation at least twice a year. Tax planning is now more important than ever with the uncertainty caused by the recent pandemic. So review your tax situation at least twice every 12 months to see how to maximize each year’s retirement contributions.
As always, should you have any questions or concerns regarding your tax situation please feel free to call.
Estimated average Social Security retirement benefits starting January 2021
All retired workers in 2020 $1,523/mo
All retired workers in 2021 $1,543/mo
Did you know? You can increase your Social Security retirement benefits by 5-8% when you delay applying until you’re age 70.
1.6% cost of living adjustment for Social Security retirement benefits and SSI payments begins with the December 2020 benefits (payable in January 2021).
The 2021 maximum Social Security retirement benefits a worker retiring at full retirement age is $3,148/mo.
Did you know…
97% of U.S. citizens over age 60 either receive Social Security or will receive it in the future.
1 in 4 seniors expect Social Security to be their primary source of income.
Social Security pays benefits to more than 70 million people including retirees, children and surviving spouses.
2021 Social Security and Medicare tax rates
If you work for someone else…
your employer pays 7.65%
you pay 7.65%
If you’re self-employed…
you pay 15.3%
Note: The above tax rates are a combination of 6.2% for Social Security and 1.45% for Medicare. There is also 0.9% Medicare wages surtax for those with wages above $200,000 single ($250,000 joint filers) that is not reflected in these figures.
Maximum amount you can pay in Social Security taxes
2020: $8,537.40
2021: $8,853.60
165+ million people work and pay Social Security taxes.
Social Security has provided financial protection for Americans since 1935.
Maximum earnings amount Social Security will tax at 6.2%
2020: $137,700
2021: $142,800
How does Social Security work?
When you work, you pay taxes into Social Security.
The Social Security Administration used your tax money to pay benefits to people right now.
Any unused money goes to the Social Security trust funds.
Later on when you retire, you receive benefits.
Social Security payments explained
SS Social Security retirement benefits are for people who have “paid into” the Social Security system through taxable income.
SSD or SSDI Social Security Disability (SSD or SSDI) benefits are for people who have disabilities but have “paid into” the Social Security system through taxable income.
SSI Supplemental Security Income (SSI) benefits are for adults and children who have disabilities, plus limited income and resources.
Maximum SSI payments
2020
2021
Individual
$783/mo
$794/mo
Couple
$1,175/mo
$1,191/mo
Here’s how to qualify for your retirement benefits
When you work and pay Social Security taxes, you earn “credits” toward Social Security benefits. The number of credits you need to get retirement benefits depends on when you were born.
If you were born in 1929 or later, you need 40 credits (10 years of work) to receive Social Security retirement benefits.
The earnings needed for a credit in 2021 is $1,470.
4 credits maximum per year.
Did you know you can check your benefits status before you retire?
You can check online by creating a my Social Security account on the SSA website. If you don’t have an account, you’ll be mailed a paper Social Security statement 3 months before your 61st birthday.
It shows your year-by-year earnings, and estimates of retirement, survivors and disability benefits you and your family may be able to receive now and in the future.
If it doesn’t show earnings from a state or local government employer, contact them. The work may not have been covered either by a Section 218 agreement or by federal law.
As part of your 2020 planning, now is the time to review funding your retirement accounts.
By establishing your contribution goals at the beginning of each year, the financial impact of saving for your future should be more manageable. Here are annual contribution limits:
Retirement Plans
2019
2020
Change
Age 50 or older catch up
IRA: Traditional
$6,000
$6,000
none
add: $1,000
IRA: Roth
$6,000
$6,000
none
add: $1,000
IRA: SIMPLE
$13,000
$13,500
+$500
add: $3,000
401(k), 403(b), 457 plans
$19,000
$19,500
+$500
add: $6,500
Take action
If you have not already done so, please consider:
Reviewing and adjusting your periodic contributions to your retirement savings accounts to take full advantage of the tax advantaged limits
Setting up new accounts for a spouse or dependent(s)
Using this time to review the status of your retirement plan
Reviewing contributions to other tax-advantaged plans including flexible spending accounts and health savings accounts
There is still time to make a contribution to a traditional IRA or Roth IRA for the 2019 tax year. The annual contribution limit is $6,000 or $7,000 if you are age 50 or over.
Prior to making a contribution, if you (or your spouse) are an active participant in an employer’s qualified retirement plan (a 401(k), for example), you will need to make sure your modified adjusted gross income (MAGI) does not exceed certain thresholds. There are also income limits to qualify to make Roth IRA contributions.
Maximum 2019 IRA Contribution amounts: $6,000 or $7,000 (with age 50+ catch-up provision)
Note: Married traditional IRA limits depend on whether either you, your spouse or both of you participate in a qualified employer-provided retirement plan. If married filing separate and either spouse participates in an employer’s qualified plan, the income phaseout to contribute is $0-10,000.
If your income is too high to take advantage of these IRAs you can always make a non-deductible contribution to an IRA. While the contributions are not tax-deferred, the earnings are not taxed until they are withdrawn.
Take a look at how Social Security benefits have changed. Use this infographic to help you plan for the coming year, and to learn a little more about retirement benefits and taxes.
Your 2020 Social Security Benefits Find out how your benefits have changed
Estimated average Social Security retirement benefits starting January 2020
All retired workers in 2019 $1,479/mo
All retired workers in 2020 $1,503/mo
Did you know? You can increase your Social Security retirement benefits by 5-8% when you delay applying until you’re age 70.
1.6% cost of living adjustment for Social Security retirement benefits and SSI payments begins with the December 2019 benefits (payable in January 2020)
The 2020 maximum Social Security retirement benefits a worker retiring at full retirement age is $3,011/mo.
Did you know…
87% of Baby Boomers are expecting Social Security to be a source of their retirement income.
1-3 people expect it to be their primary source of income.
Social Security pays benefits to more than 67 million people including retirees, children and surviving spouses.
2020 Social Security and Medicare tax rates
If you work for someone else…
your employer pays 7.65%
you pay 7.65%
If you’re self-employed…
you pay 15.3%
Note: The above tax rates are a combination of 6.2% Social Security and 1.45% for Medicare. There is also 0.9% Medicare wages surtax for those with wages above $200,000 single ($250,000 joint filers) that is not reflected in these figures.
Maximum amount you can pay in Social Security taxes
2019: $8,239.80
2020: $8,537.40
165+ million people work and pay Social Security taxes.
Social Security has provided financial protection for Americans since 1935.
Maximum earnings amount Social Security will tax at 6.2%
2019: $132,900
2020: $137,700
How does Social Security work?
When you work, you pay taxes into Social Security.
The Social Security Administration used your tax money to pay benefits to people right now.
Any unused money goes to the Social Security trust funds.
Later on when you retire, you receive benefits.
Social Security payments explained
SS Social Security retirement benefits are for people who have “paid into” the Social Security system through taxable income.
SSD or SSDI Social Security Disability (SSD or SSDI) benefits are for people who have disabilities but have “paid into” the Social Security system through taxable income.
SSI Supplemental Security Income (SSI) benefits are for adults and children who have disabilities, plus limited income and resources.
Maximum SSI payments
2019
2020
Individual
$771/mo
$783/mo
Couple
$1,157/mo
$1,175/mo
Here’s how to qualify for your retirement benefits
When you work and pay Social Security taxes, you earn “credits” toward Social Security benefits. The number of credits you need to get retirement benefits depends on when you were born.
If you were born in 1929 or later, you need 40 credits (10 years of work) to receive Social Security retirement benefits.
The earnings needed for a credit in 2020 is $1,410.
4 credits maximum per year.
Did you know you can check your benefits status before you retire?
You can check online by creating a my Social Security account on the SSA website. If you don’t have an account, you’ll be mailed a paper Social Security statement 3 months before your 61st birthday.
It shows your year-by-year earnings, and estimates of retirement, survivors and disability benefits you and your family may be able to receive now and in the future.
If it doesn’t show earnings from a state or local government employer, contact them. The work may not have been covered either by a Section 218 agreement or by federal law.
Sources: SSA.gov, 17th Annual Retirement Survey, Transamerica Center for Retirement Studies®
