Yahoo Finance How to Save for Retirement When You're Self-Employed
One of the first things to do when you become self-employed is to start up a retirement account. Maybe you're not ready to start socking away thousands per year yet. But when you are, you need a flexible retirement plan that will allow you to start saving for the future.
For many people who are self-employed, an individual retirement account is the simplest option. But with a $5,500 annual contribution limit (plus a $1,000 catch-up provision for those age 50 and older), an IRA isn't likely to give you enough tax-deferred savings to fund a comfortable retirement.
Instead, you should start out your self-employment with a plan in place to save more for retirement. Once your business starts taking off, you'll be glad for the ability to save extra money in a tax-deferred account.
[See: How to Save for Retirement on Less Than $40,000 Per Year.]
The IRS offers several retirement plans for business owners and the self-employed. The key is to choose the right plan for your business model from the start. Making changes down the road can be expensive and frustrating. When you're ready to open your retirement account, check out these options:
Simplified employee pension IRA. This account functions like a traditional IRA, in that you make pre-tax contributions or get a tax deduction for your after-tax contributions. And you can contribute quite a bit to these accounts: up to 25 percent of your net earnings from self-employment up to a maximum of $53,000 in 2016. This type of plan is simple to administer, and you can decide throughout the year or at the end of the year how much to contribute. However, if you add employees to the SEP-IRA, you have to contribute the same percentage to their accounts that you put into yours.
SIMPLE IRA. This savings incentive match plan for employees is simple to set up for small businesses and the self-employed. You can contribute up to 100 percent of your net self-employment earnings, up to $12,500 (plus a $3,000 catch-up contribution for those age 50 and older) in 2016. Employers are required to contribute to a SIMPLE IRA each year. The 2 or 3 percent company contribution means you could potentially contribute more than the $12,500 to the account in one year.
[See: Retirement Savings Tax Breaks for High Earners.]
Solo 401(k). A solo 401(k) is set up for sole proprietors or businesses run by a married couple. You can save $18,000 in personal contributions to the account, plus an additional $6,000 if you're 50 or older, on a tax-deferred basis. As an employer, you can also contribute up to 25 percent of your net earnings from self-employment up to the annual maximum of $53,000 for 2016.
Which plan is best? The plan that will allow you to save the most of your self-employment income depends on your current situation and your projected future income. The solo 401(k) and SEP-IRA options have higher overall contribution limits. But if you're earning relatively little income from self-employment, a SIMPLE IRA that allows you to save 100 percent of that income, rather than capping you at 25 percent, might be a better fit.
If you're working a day job and using your self-employment income to save more for retirement, a SIMPLE IRA may be your best bet. But if you're an entrepreneur hoping to bring in a six-figure income, the other two options will ultimately allow you to save more over time.
[See: 10 Financial Perks of Getting Older.]
Your plans to add employees to your business will also make a big difference. With a solo 401(k), you can't add employees, so you'd have to change your plan if you hired someone who wasn't your spouse. With the other plans, you might be required to contribute the same percentage of compensation to each employee account.
Ultimately, you will need to do some research on your current and potential income as an entrepreneur, and then talk to a professional financial advisor about which retirement savings option will allow you to save the most money.
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