Retirement is complicated for those considered self-employed, including business owners and entrepreneurs in all categories.
Around 10 percent of all Americans who earn a paycheck consider themselves to be self-employed. This segment of the working population may be falling behind on retirement savings.
While studies show that about 42 percent of people who are self-employed or small business owners have no retirement savings at all, being self-employed should not be an excuse to skip on retirement savings.
Here are three accounts for retirement that may be ideal for you:
An IRA is the easiest way for self-employed people to save for retirement. This is a private retirement savings account set up at a financial institution which allows individuals to save for retirement with tax-free growth or on a tax-deferred basis.
At the time of their retirement, many individuals find themselves in a tax bracket that is lower than they were before retirement. Tax-deferral means that the money in their account grows tax-free and is taxed later, at the lower rate.
You get a tax break on the saved income today for your contributions to a traditional IRA. Another major benefit of a traditional IRA account is the ease with which you can open and set up these accounts, sometimes taking just a few minutes at an online brokerage.
A solo 401(k) plan is very attractive for those who can and want to save a lot of money for retirement or for those who want to save a great deal in some years. This plan is just like a standard, employer-offered 401(k) in which you make your contributions pre-tax.
Under a solo 401(k) you cannot make contributions to any employees you might have. But it does allow you to hire your spouse in order to contribute more to the plan.
Your spouse can contribute up to the standard employee contribution limit of a 401(k).
A solo 401(k) can be opened at many online brokers. You will have to file required paperwork with the IRS each year you have more than an amount of $250,000 in your bank account.
A Simplified Employee Pension (SEP) IRA is best for people who are self-employed or small-business owners with very few or no employees.
A SEP IRA is much easier to maintain than a solo 401(k) as there is no administrative burden and no reporting to the IRS. They are also very flexible as you do not have to contribute every year and can do so whenever you are comfortable.
One of the downsides of a SEP IRA is that you have to make contributions for all employees equaling in the percentage of pay to the ones that you make for yourself. This can be very costly for you if there are a large number of employees at your business.