Navigating Retirement When You’re Self-Employed

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Being self-employed has its ups, but it can also have its downs. For one, there may be enormous business costs to worry about, and you likely have to finance your retirement account entirely on your own. Fortunately, there are a number of self-employed retirement plans that can help you save enough for retirement.

In fact, these specialized plans allow you to save significantly more than you could with traditional retirement accounts. That’s because self-employed workers typically don’t have the employer contributions and match benefits that many traditionally employed workers enjoy. By contributing to one of these accounts, you can save a ton in taxes this year with an upfront tax break and tax-deferred growth.

SEP IRA

The Simplified Employee Pension (SEP) IRA plan is similar to a traditional IRA, but does not have the high start-up or operating costs of a conventional retirement plan. Instead, there are low administrative costs, and the plan is simple to operate. Any contributions you make to your SEP IRA are with pre-tax funds. You will be required to take a minimum distribution at age 70 ½.

The maximum contribution amount for an SEP IRA is $53,000 per year ($59,000 if you’re age 50 or older), or 20% of your net earnings from self-employment.

Contributing to your SEP IRA can lower the amount of income you pay taxes on now. Once you retire, your withdrawals will be taxed at your ordinary income tax rate. If you make withdrawals before age 59 ½, there will be an additional 10% early withdrawal penalty fee added. You may also be eligible for a tax credit of up to $500 per year for the first three years to cover the cost of starting the plan.

SIMPLE IRA

The Savings Incentive Match Plan for Employees (SIMPLE) IRA Plan allows both the employee and employer to contribute. Contributions are on a pre-tax basis, and you will be required to take a minimum distribution at age 70 ½.

The maximum contribution amount for a SIMPLE IRA is $12,500 per year, $15,500 if you’re age 50 or older, plus an employer contribution of 3% of income.

Contributing to your SIMPLE IRA can lower the amount of income you pay taxes on now. Once you retire, your withdrawals will be taxed at your ordinary income tax rate. If you make withdrawals before age 59 ½, there will be an additional 10% early withdrawal penalty fee added. The penalty is 25% if you make withdrawals within the first two years of participating in the plan.

Individual or Solo 401K

This is very similar to a traditional 401K plan, with lower maintenance charges. Any contributions you make to your self-directed 401K plan are with funds you haven’t been taxed on yet. You will be required to take a minimum distribution at age 70 ½.

The maximum contribution amount for an Individual or Solo 401K is $18,000 per year ($24,000 if you’re age 50 or older). With a profit sharing contribution, business owners can contribute up to 20%–25% of the business earnings. The total contribution limit is $53,000 per year ($59,000 if you’re age 50 or older).

Contributing to an Individual or Solo 401K plan can lower the amount of income you pay taxes on now. Once you retire, your withdrawals will be taxed at your ordinary income tax rate. If you make withdrawals before age 59 ½, there will be an additional 10% early withdrawal penalty fee added.

What’s Right for You?

If you aren’t sure about which self-employed retirement account is right for you, consider speaking with a financial adviser. They can help you make informed decisions based on your financial situation and retirement goals.

Don’t Wait to Sign Up

Don’t wait any longer to start investing. The sooner you get your retirement plan going, the sooner you can begin taking advantage of compound interest. (Visit the IRS’ website for information on how to set-up one of these plans.) Most self-employed workers claim that their lack of preparation for retirement is due to their limited budget. However, nearly all retirement experts agree on one thing: It doesn’t matter how much you’re saving for retirement, as long as you’re saving.

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