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Do you recommend Simplified Employee Pension Plan

Dear Dave,

Will you please explain the advantages of a Simplified Employee Pension Plan (SEPP), and do you recommend this?

Debbie

Kansas City, MO

Dear Debbie,

Yes, I most certainly do recommend them. They are excellent for small companies that have one or two employees where you are self-employed. You can save up to about 15 percent (there is actually a formula to it and it comes out at about 13.8 percent) of your taxable profit on the business. If the business were to make $100,000 in a year, you can save $13,800 in the SEPP. There is a limit, but it is somewhere around $25,000. But you can save a ton of money in there. It works like the old IRA in that it is tax-deductible, and it grows tax deferred. It is an excellent way to begin to save money.

I would recommend that you do a ROTH IRA first and foremost. I say that because that money will grow tax-free. But after that, if you are self-employed and you’ve got employees that haven’t been with you for long?and, therefore, don’t meet the guidelines where you have to put the money in for them as well?then the SEPP becomes a really good way to save money.

Dave


Low-limit credit card best way to re-establish

Dear Dave,

I recently read in a financial magazine that the best way to re-establish my credit after I have filed for Chapter 7 bankruptcy is to go out and get a low-limit credit card, charge small purchases, and then pay it off every month. The article stated that it is easy to get a credit card after bankruptcy because the bank knows that you can’t file again for another seven years.

What do you think of this advice, and if this isn’t a good idea, what is another option?

Kimberly

Trenton, NJ

Dear Kimberly,

Whoever wrote that article is an idiot. That is horrible, horrible advice. Let’s think about this: you filed Chapter 7 bankruptcy. Why did you do this? Because you got too far in debt. Don’t you think that debt is something you need to avoid? Why do you want to re-establish your credit? So you can go borrow money and get deeply in debt again? That is ridiculous.

Here is what you should do: you don’t re-establish your credit. You just tell yourself that borrowing doesn’t work and that you are not going to borrow ever again. If you go three or four years after bankruptcy without borrowing a dime; you add no new entries on your credit bureau report; that will show a potential mortgage lender that you got the point the first time. It shows them that you have wisdom.

The bottom line is you have to learn your lesson from your bankruptcy. Getting credit cards and car loans was the reason you had to file in the first place. So the last thing you want to do is to take the same steps and find yourself in the same situation before you know it. The definition of insanity is doing the same thing over and over and expecting a different result. Getting another credit card and expecting that this time you will be building wealth somehow and re-establishing your credit is an insane thought.

I hope you are getting my point. You can’t borrow your way to wealth. You need to change the behavior in order to change the results.

Dave

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