Without proper planning, retirement is rapidly becoming an impossible dream for many. If you're self-employed it becomes even more difficult to choose the right path to retirement.
Our self employed retirement calculator is a helpful tool that explores the available types of retirement plans for small business owners and self-employed individuals. To learn about these plans and for help picking out the right plan for your needs, check out our FAQ below.
When deciding which savings plan works best for your needs, our Self Employed Retirement Calculator is an excellent tool.
It allows you to explore your options and discover what you are legally able to contribute per year to different types of retirement plans.
Albert Einstein once said that compounding interest is the most powerful force in the universe. Putting money away early and letting it grow over the long term is the best way to ensure a comfortable retirement.
To see how your money can grow over time in different accounts, check out our other retirement calculators.
Saving for retirement is one of the most important things to do during your working years. Social Security by itself is rarely enough income to live on comfortably during your retirement.
It can be difficult as a regular salaried worker to decide how to save. Figuring out where to put your money as a small business owner can be even more confusing.
Here are some of the most effective retirement plans for self-employed individuals:
Let's explore them more thoroughly.
Individual retirement accounts are open to anyone who has a working income of less than $275,000 per year. This includes salaried work, freelancing, consulting, and other forms of labor but not investment income.
There are two kinds of standard IRA. A traditional account using pretax income up to an annual limit of $5,500. And a Roth IRA using taxed dollars.
For a traditional account, you're required to pay taxes on the proceeds once you retire. A Roth IRA allows you to contribute income that is already taxed. Once you retire, you can withdraw the proceeds tax-free.
Both Roth and traditional IRAs allow you to save money in a tax-advantaged manner. For a traditional IRA, this means you can contribute pre-tax dollars. This allows you to start with a larger principle and benefit from the growth. This kind of account is best if you believe you will have a lower income tax rate during retirement.
A Roth IRA lets you contribute taxed money that can then grow without the need to pay additional taxes. If you believe your income will rise throughout your life this can be a great way to benefit from the lower tax rates of your youth.
Setting up an IRA is probably the fastest and easiest way for a self-employed person to save for retirement. It requires no special forms or other filings with the IRS.
IRAs are only available up to a point. If your income exceeds $275,000 you are ineligible for IRA contributions. The relatively low ceiling on standard contributions, $5,500, is also a downside if you have high earnings.
A SEP IRA is an easily created retirement savings vehicle that includes all the tax deferral benefits of other IRAs. SEP's are best for freelancers or small business owners with few to no employees.
SEP IRA's allow you to save a relatively large amount of money each year. In 2018, you can save the lesser of 25% of net income or $55,000. Whats more, you can make contributions at any time up until the due date of your income tax filing.
You can deduct the total value of your SEP contributions from your annual tax return. This provides substantial tax savings.
It can be created by filling out a single form, 5305-SEP, with the IRS and has no annual reporting requirements. Funds are accessible once you turn 59 and1/2. You must begin taking contributions from it at 70 and 1/2.
The downside to a SEP IRA is that it must include all eligible employees. If you wish to contribute 25% to your SEP plan and you have four employees, you must make the same contribution for them.
A SEP IRA is a great savings vehicle for sole proprietors and other small business owners who have no employees.
The SIMPLE IRA is another savings option that is easy to set up and allows relatively large contributions. It includes all the tax deferral benefits of other IRAs.
A SIMPLE IRA allows you to contribute up to $12,500 per year. It also allows an additional catch up contribution of $3,000 if over age 50. It has the same cutoff income, $275,000, that traditional IRAs have.
This plan is excellent for small business owners who have up to 100 employees. You are required to offer the plan for every eligible employee but not to match their contributions to your own.
The law requires at least a 3% match for the creation of the plan. You can also meet the requirement with a blanket 2% contribution to all employees accounts. Beyond that, you can make as high a contribution as you wish up to the limit.
Contributions to a SIMPLE IRA count against other retirement contribution limits. If you have a 401k) or other IRA you cannot contribute more than the total contribution limit to a SIMPLE across all accounts.
A solo 401(k) provides the highest overall contribution ceiling but comes with a lot of caveats. It is the most difficult type of retirement account to set up.
Once set up you can make annual contributions of up to $19,000 plus $6,000 catch up if over 50. You can also make contributions as the employer for the lesser of 25% of your gross income or $56,000 per year.
This plan includes all the standard tax benefits of a 401(k) plan. Contributions are made using pre-tax dollars and taxes are paid on the proceeds in retirement.
This plan will only work if you and your spouse are the only employees of your company. You must make the same level of contributions across the board as the employer.
It is the most complicated plan to set up and includes annual reporting requirements once the balance exceeds $250,000.