How Should the Self-Employed Save for Retirement?

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Self-employed individuals require intentional retirement planning.

You are self-employed.


This means you have the entrepreneurial spirit.

You are driven, dedicated, and hardworking.

Any success (or failure) in your business can usually be tracked back to what you have done (or not done) as the business owner.

According to a recent Spokane Journal article titled “Self-employed professionals see more retirement flexibility,” the self-employed are also solely responsible for their own retirement as well as their businesses.

Self-employed individuals do not benefit from employe matched 401(k)s.
A number of retirement planning tools are available to the self-employed.

How does one shoulder this responsibility?

There are a number of options.

First, you could utilize a personal traditional IRA or Roth IRA.

Other options include establishing a Simplified Employee Pensions IRA, Simple IRA, or Solo 401(k) through your business.

How are these different?

First, Simple IRAs require less paperwork than normal 401(k)s, making them more desirable for the small business owner.

The Solo 401(k) has a higher limit for contributions.

As an self-employed individual, you can contribute up to $55,000 each year.

The Simplified Employee Pensions IRA, or SEP IRA, is great for business owners.

Although it functions much like a traditional IRA, the contribution limit is higher at $57,000 for 2020.

Also, contributions can be made up to the submission of your tax return.

Since your contributions are made from pre-tax earnings, you enjoy an upfront tax break by reducing your taxable income.

As a self-employed individual, you will eventually pay these taxes in retirement when the funds are withdrawn as income.

Roth IRAs function differently in regard to taxes.

Contributions to a Roth IRA are made with after-tax dollars and the annual contribution limits are far lower at $6,000, unless you are older than age 50.

If you are older than 50, you will be able to contribute up to $7,000.

Unlike the SEP IRA, however, the Roth IRA withdrawals are not taxable in retirement.

Another option for the self-employed would be a taxable investment account.

Using one gives you more flexibility and fewer limitations.

A lot fewer limitations.

Anyone can contribute money and there are no caps on the contributions.

Whatever options you choose, be sure to save consistently and leave enough money to pay your taxes.

You would be well-served to develop a long-term relationship with a financial advisor who focuses on retirement planning.

Sounds like a great resolution to start 2020, yes?

Reference: Spokane Journal (December 5, 2019) “Self-employed professionals see more retirement flexibility”

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