Saving for Retirement When You’re Self-Employed

Being self-employed has its fair share of benefits, but requires extra attention to financial planning for the future, especially retirement. According to the Bureau of Labor Statistics in 2015, there were 15 million Americans that were self-employed. Self-employed individuals have to provide their own healthcare and benefits and save for their retirement. These tasks can be difficult when individuals cannot necessarily count on a steady paycheck and a regular income. You may not feel ready to start saving thousands per year, but when that time comes, a retirement plan will be extremely useful. The Internal Revenue Service (IRS) offers various plans with unique advantages for those who are self-employed.

1. Simplified Employee Pension IRA

Contributing money to this account will allow it to grow tax-free until retirement. You are able to invest up to 25% of your net earnings up to a maximum, which ended up being $53,000 (in 2016). This type of plan is easy to set up at a bank, mutual fund company, or brokerage firm, and some banks allow you to open one online. This kind of account is simple, easy to establish, and increases flexibility because it lets you decide how much you want to contribute throughout or at the end of the year. If you do have employees working for you, you are required to invest the same amount of money into their accounts as you do into yours.

2. SIMPLE IRA

This savings incentive match plan for self-employed individuals and their employees allows individuals to put 100% of their net earnings into the account, up to $12,500 (in 2016). Individuals older than 50 can contribute $3,000 more each year for “catch-up” deposits. Employers are also required to pay a 2 to 3% company contribution to this account for employees, which could potentially allow you to add more than $12,500 per year. The money that you add is tax-deductible and remains tax-free until you begin drawing money out of the account. It is typically used by small businesses with employees, the self-employed, and solo entrepreneurs. Unfortunately with this type of account, contribution limits are lower.

3. Solo 401(k)

This type of plan is a good choice for individuals with a large income and is typically used by sole proprietors and businesses owned by couples because it allows for larger contributions. It is possible to add up to $18,000 per year (in 2017), in addition to $6,000 for those age 50 and older. Adding to these amounts, you can contribute an additional 25% of your self-employment net earnings, for up to a total of $54,000 (in 2017). The negative side of a solo 401(k) is that it requires more paperwork than a Simplified Employee Plan (SEP) IRA. If there are employees other than your spouse that work for the business, it is no longer a “solo 401(k).” A normal 401(k) plan is not exempt from discrimination testing.

It is always in your best interest as an entrepreneur and business owner to do research on your current and future income and be knowledgeable about the direction of your business. If you need more information than is available here, Veitengruber Law can put you in touch with a professional financial adviser in our trusted network.