Financial Planning - RIA's should address their own retirements
Advisers who move from employee status to an RIA must take on new responsibilities, such as preparing for their own retirements.
“The cobbler’s children have no shoes,” says David Edwards, president of and wealth adviser at Heron Financial Group in New York. “Ironically, some advisers spend all year working on their clients’ retirement plans, yet neglect their own.”
For a solo adviser with an employee or two, a SEP-IRA “makes the most sense,” Edwards says. “This plan has exceptionally low administration costs, unlimited investment choices, and maximum annual contributions of the lesser of 25% of income or $53,000 in 2016.” The ceiling will be $54,000 next year.
The catch? As employers, advisers must contribute the same percentage of income to employees as to themselves. “As you ramp up employees, this quickly becomes unaffordable,” Edwards says. An RIA firm with three or more employees might be best served with a conventional 401(k) plan.
“If the adviser already uses a payroll processing service, adding a 401(k) is a minor additional expense,” Edwards says.
“The adviser can design the investment choices and decide to have only employee contributions to the plan, so there’s no out-of-pocket expense to the firm’s owner,” he says. “Alternatively, advisers can choose to do an employer match, which is an extra expense, but tax-deductible.”
Edwards’ firm has a conventional 401(k) as its retirement plan.
“We enroll new employees automatically on the date of hire, with a 3% withholding rate [more if they want],” he says. “We encourage people to bump up their withholding by one percentage point every time they get a salary increase, up to the maximum contribution.”
