Being self-employed can be great. As your own boss, you can enjoy freedom, flexibility, and increased family time. But it seems that many self-employed individuals often forget to put money into their retirement accounts because they either don’t make it a priority or are not sure the best way to do so. Maybe you aren’t setting aside money because your income is inconsistent or you fear cashflow issues. Perhaps the reason is that it is just too much to think about. Whatever the reason, you can no longer afford to ignore the importance of retirement saving any longer. In this article I will give you some guidance on how to make saving for retirement a priority.
Get Clear On The Numbers
The first step is to look carefully at your income and household budget. This can be more challenging than it is for salaried or wage-earning employees if your self-employment income fluctuates significantly. In order to manage this and maximize your retirement savings, think of your retirement savings as a regular bill, no different than your rent or mortgage. Would you, under normal circumstances, think of not paying your rent or mortgage? If not, you should take the same approach to your retirement accounts.
How much money should you save each month? It depends on a few factors. First, you need to determine how much you will need to retire comfortably. Don’t forget to account for inflation, income increases, return expectations, expected Social Security, and your expected retirement age. Getting clear on the numbers and knowing how much you need to save will help you determine the best kind of retirement account for you.
Decide Where To Put Your Money
The good news is, just like employees that have the option to participate in company plans. You also have many options to save for retirement when you are self-employed. Here are the types of plans from which you can choose:
Traditional IRA: In most cases, an IRA is one of the easiest ways for self-employed people to get started with retirement savings. There are no special filing requirements and you can put aside up to $6,000 tax-deferred in 2020, $7,000 if you are 50 or older.
Roth IRA: The Roth IRA is just as simple to get started with as a traditional IRA as long as you are within the set income limits, with no special filing requirements. You have the option to save up to $6,000 in 2020, $7,000 if you are 50 or older. While there is no tax deduction for Roth IRAs, your withdrawals will be tax-free in retirement.
SEP IRA: Whether you are a solopreneur or a small business owner with only a few employees, the SEP IRA may be a good option. It doesn’t require annual reporting to the IRS and has high contribution limits. But if you have employees, you’ll have to make contributions to their accounts equal to your contribution, by percentage of income.
Solo 401(k): This single-participant plan works exactly like an employer-offered 401(k) plan. You can make pre-tax or after-tax contributions as both an employer and participant—up to $19,500 in 2020, or $26,000 if you are age 50 or older, as a participant and an additional 25% (minus your personal contribution) as the employer, for a total limit of $57,000, $63,500 if you are 50 or older.
Defined Benefit Plan: If you are a self-employed professional making a high income, you can set up a guaranteed income in retirement, which is essentially setting up your own pension plan. Contributions are typically tax-deductible and limits are high. However, plans can be complex and expensive to administer and requires hefty fees. You may want to consider this option if you are nearing retirement and can put aside large amounts tax-deferred.
SIMPLE IRA: This plan has a lower contribution limit than many other options and is less flexible, but if you own a midsize company with fewer than 100 employees, it can be a good plan as it is fairly easy to set up and administer. Employees can contribute through tax-deferred salary withholding, and as an employer, you would generally be required to make contributions based on a percentage of employee’s salary.
When deciding where to put your money, the best types of account depends on a number of factors, including your age, how much you’re able and willing to save, the level of administrative complexity and cost you can manage, and whether or not you have employees.
Opening And Funding Your Retirement Accounts
Now that you know what options are available to you, you will need to decide which account or combination of accounts you want to open. If you are still uncertain, consider speaking with a financial advisor who is familiar with financial planning for self-employed people.
When you are ready to open an account, you will also need to decide where to open it. You can work directly with a broker to walk you through the process and an accountant who can advise you on the tax implications of your choices.
If you need help sorting through your choices, you can set up an initial consultation call by clicking here.
Russell D. Rivera, CFA, CFP® is the Founder and President of Voice Wealth Management (Voice) in New York, NY. He also likes to think of himself as a Personal CFO and Financial “Therapist” for entrepreneurs, young professionals, and their families. He helps clients make prudent financial decisions regarding spending, saving, investing, and planning while giving a voice to the individual client's financial priorities and experiences.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.
This material was prepared by Crystal Marketing Solutions, LLC, and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate and is intended merely for educational purposes, not as advice.