Retirement Plans for the Self-Employed

Women all across the country are starting their own business or joining the “gig economy” as freelance graphic designers, photographers, or even Uber drivers. According to the U.S. Bureau of Labor Statistics, just over 10% of all U.S. workers are self-employed. Women make good entrepreneurs because they are able to juggle lots of tasks and respond to a myriad of demands. If you are proudly working for yourself, you may be wondering how to plan for retirement. Unlike your cubicle-working friends and family members, you do not have access to a convenient 401(k) and can’t take advantage of an employer match. A nice pension at the end of your working life also isn’t in the cards.

This just means that you’ll have to be a little more focused and directed as you establish and fund your own personal retirement. Here are your choices.

IRAs
The easiest plan is to establish is an Individual Retirement Account, (IRA). The biggest drawback, however, is that you can contribute only $5,500 a year ($6,500 if you are 50 or older). An IRA might be a good choice if you’re just starting out and can afford only minimal contributions. Regular IRAs are tax-deductible, but if you are in a low tax bracket, consider a non-deductible Roth IRA that will grow tax-free instead.

SEP-IRAs
Just as at the burger joints, you can super-size your IRA easily. If you want to contribute more than $5,500 to an IRA, the SEP-IRA (SEP stands for Simplified Employer Pension) will let you plunk 13.04 percent of your net business income into the SEP-IRA, up to $30,000. What’s the catch? You’ll have to cover all employees over twenty-one years of age who have been working for you for the past three years, and that can get expensive. SEP-IRAs are more popular among self-employed business owners with no employees.

SIMPLEs
This plan also requires that you cover employees, but to a lesser extent. This Savings Incentive Match Plan for Employees (whew, that mouthful of a name is far from “simple”) operates like a simplified 401(k) salary deferral plan with an employer match. It requires you to kick in only three percent of your employees’ wages, and it covers employees who have earned at least $5,000 in two prior years and are expected to earn $5,000 this year. You can put in up to $12,500 for yourself (plus another $3,000 if you are 50 or older), and your employees can make tax-deductible contributions to the plan as well.

Defined Benefit Plans
A Defined Benefit plan is the Rolls Royce of entrepreneur retirement plans, but significant red tape is involved. With a Defined Benefit plan, you can tailor the plan to allow hefty contributions for yourself while requiring much smaller contributions for your employees. With a defined benefit plan, you can contribute 100 percent of your salary, or whatever is necessary to generate a maximum of $215,000 retirement benefit per year. But they require the services of an actuary, and you must file a Form 5500 tax report with the IRS on a regular basis.

If you are an employee and your business is a sideline, you should contribute the maximum possible amount to your work 401(k) or 403(b) plan before investing in a self-employed plan. The advantages here are that your employer may match your contributions, the contributions to the 401(k) plan are by painless payroll deductions and most 401(k) plans allow you to borrow from the plan for education, hardships, or general purposes.

You can set up any of these plans through most financial institutions, brokerage houses, and mutual fund companies. You can find more detailed information on retirement plans for entrepreneurs at the retirement section of quicken.com.

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Comments

  1. Jeff MacD says:

    I am self employed and use Steidle Pension Solutions to handle my retirement plan. They have been excellent ever since I set up the plan 5 years ago. I had a lot of questions regarding choosing the right type of plan and financial institution and the reps at Steidle were there to answer my questions on ways that I could clearly understand. They walked me through the process and have been just as good ever since.

  2. Wheeler Runyon says:

    According to Patrick Kelly (and my own experience with clients) author of Tax-Free Retirement, business owners and medical professionals should consider Investment Grade Life Insurance (IGLI). Here are 6 reasons why: (1) As a business owner you need life insurance to cover your debts and to protect your family. (2) A business will usually provide and owner with the opportunity for plenty of deductions but once she retires, the owner will find themselves with little or no tax write offs. This is why there is a need tax-advantaged income in retirement and a IGLI policy can provide tax-free retirement if structured properly. (3) Life insurance is not considered a tax-qualified plan, therefor, there is no requirement for an owner o fund a similar plan for their employees. (4) There are no contributions limits. (5) There is no separate record keeping or tax forms required. (6) Finally, it provides for instant liquidity for the heirs of the business owner or estate if she decides to keep the business until her death. For more information, please fell free to call me at (619)721-0176

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