SUMMARY: While there are many perks of being self-employed, there are also downsides—such as providing for your own retirement. If you’re self-employed, check out these helpful retirement options.
There are many perks to being self-employed. You set your hours, take on only the clients you want, and can pick the kids up from school or hit the gym midday without a supervisor giving you a sideways glance.
There are downsides as well, which include needing to provide for your own retirement. This makes careful planning even more essential than for those sitting pretty with their employer’s 401(k) or 403(b).
With a growing number of workers wanting to dip their toes into entrepreneurship—66 percent of millennials, according to a Bentley survey reported in Forbes—this issue will become increasingly relevant in the years to come.
Luckily, there are many retirement resources for those who decide to be their own boss.
Basic, taxable accounts
It may seem simple, but an easy way to jump-start your retirement savings is, well, to just start saving in a regular account at a bank, mutual fund or brokerage. The benefits are basic but useful—easy access to your money and price gains won’t be taxed until you sell your shares.
Also known as a “one-participant 401(k),” this savings tool can be an efficient way to put a lot of money away for retirement. That amount can vary widely depending on fluctuations in your personal finances. When business booms, you can put a lot in; when it trickles, you can scale back.
Best used by people with no employees, a solo 401(k) carries a contribution limit of 100 percent of earned income, or $56,000 (with $6,000 in catch-up contributions if you’re age 50 or older), whichever is less. In a solo 401(k), you are both employer and employee. It shares some features with a standard 401(k)—contributions are pre-tax, and distributions after age 59½ are taxed. A Roth 401(k) is another option, ideal if you anticipate having a higher tax rate in retirement.
Traditional or Roth IRA
Second only to a basic bank account, an IRA is arguably the simplest way for the self-employed to launch their retirement savings, particularly for those who are just starting their business or save less than $6,000 a year. Use it whether you employ a team or work solo. There are no additional filing requirements.
Contributions to a traditional IRA are deductible, but not for Roth IRAs. Withdrawals from a Roth IRA after retirement are tax-free, which might appeal to entrepreneurs who aren’t yet bringing in a major salary. Note that once the money really begins to flow, you may max out your eligibility for a Roth IRA.
If you have employees, a SEP IRA requires that you contribute an equal percentage of salary for each eligible employee, which includes you. Any amount you want to sock away for yourself also needs to go to each worker.
Contribution limits are significantly higher than for your traditional IRA—either $56,000 or 25 percent of net earnings, whichever is lower. However, SEP IRAs do not allow for catch-up contributions.
These accounts are fairly low-maintenance, with no annual reports to the IRS and minimal paperwork. And you can vary your participation based on how the business performs in a given year.
A SIMPLE (Savings Incentive Match Plan for Employees) IRA is ideal if you own a company with fewer than 100 employees. Setup is simple, and each worker owns his or her account.
Contribution limits are a bit lower than for a solo 401(k) or SEP IRA ($13,000 in 2019). And there are steep penalties for early withdrawals—up to 25 percent if you take money out in the first two years, including rollovers.
Defined benefit plan
Essentially a pension plan for the self-employed, this option provides guaranteed income in retirement and is beneficial if you are a high earner who wants to put away significant sums each year. But it is pricey and complicated, with annual fees, high setup costs, and a lot of administrative work.
A unique plan for everyone
There are a number of factors that go into planning a self-employed retirement—level of annual savings, tolerance for paperwork, how many (if any) people you employ, taxes and contribution limits all play a role in determining the best fit for your situation. The options can feel overwhelming, but our retirement plans e-book is a great place to start. Our free ebook outlines many issues that people face before retirement and offers suggestion on how to maximize your retirement options. Download our guide today and get started on your future!