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6 Self-Employed Retirement Plans: Know Your Available Options

Self-employed retirement plans

Being self-employed comes with a lot of perks. You get to set your own schedule, choose the projects that matter most to you, and make key decisions that shape the course of your career. However, one of the challenges of being your own boss is managing your own benefits, including planning for retirement.

Without the built-in HR support that comes with traditional employment, self-employed individuals need to take extra steps to create a solid retirement plan. The good news is there are several retirement plans specifically designed for self-employed individuals. Understanding these options can help you create a plan for your future.

In this article, we’ll explore the importance of self-employed retirement plans, when to start planning, and the various options available to you. By taking control of your retirement planning now, you can potentially set yourself up for a comfortable and financially stable future.

The Importance of Retirement Planning for the Self-Employed

Retirement planning is crucial for everyone, but it holds particular significance for self-employed individuals. Without employer-sponsored retirement benefits, the responsibility of securing a comfortable future rests entirely on your shoulders.

Here’s why self-employed retirement plans are essential:

  • Financial Independence: Building a substantial retirement fund can help you maintain your lifestyle and independence during retirement, without relying on others for financial support.
  • Reduce Stress: Knowing you have a solid self-employed retirement plan in place can reduce stress and allow you to focus more on your business and personal life.
  • Tax Benefits: Many self-employed retirement plans offer significant tax advantages, helping you reduce your taxable income now while saving for the future.
  • Compounding Growth: The sooner you start saving, the more time your investments have to grow, thanks to the power of compound interest.

Key Reasons to Prioritize Self-Employed Retirement Plans

  • No Employer Contributions: Unlike traditional employees, self-employed individuals don’t receive employer contributions to their retirement plans. This makes it even more critical to set aside funds independently.
  • Longevity: With increasing life expectancies, having a robust self-employed retirement plan helps you have enough savings in your later years.
  • Economic Uncertainty: A well-planned retirement fund can act as a buffer against economic downturns or unexpected financial challenges.

Steps to Start Your Self-Employed Retirement Planning

  • Assess Your Financial Situation: Take a detailed look at your current financial status, including income, expenses, debts, and existing savings.
  • Set Retirement Goals: Define what you want your retirement to look like. Consider factors such as your desired lifestyle, healthcare needs, and any plans for travel or hobbies.
  • Explore Self-Employed Retirement Plans Options: Research the various self-employed retirement plans available to find the one that best suits your needs.
  • Create a Savings Strategy: Determine how much you need to save each month or year to reach your retirement goals.
  • Seek Professional Advice: Consult with a financial advisor to discuss your plan and determine if it’s comprehensive and aligned with your long-term goals.

By prioritizing your self-employed retirement planning now, you can create a roadmap that can potentially lead to financial security, allowing you to enjoy the freedom and flexibility that come with being self-employed.

When Should Self-Employed Individuals Start Planning for Retirement?

Starting your retirement planning early is important, especially when you are self-employed. The sooner you begin, the more time your money has to grow.

Here’s a look at the best times to start planning and how to go about it.

Early Career

  • Start saving as soon as possible, even if it’s a small amount.
  • Establish good financial habits early, such as budgeting and regular contributions to a retirement plan.
  • Explore options like Traditional and Roth IRAs, which are suitable for those just starting out.

Mid-Career

  • Increase your retirement contributions as your income grows.
  • Consider more robust self-employed retirement plans like SEP IRAs or Solo 401(k)s.
  • Reevaluate your retirement goals and adjust your savings strategy accordingly.

Nearing Retirement

  • Maximize your contributions to retirement accounts, including catch-up contributions if you are over 50.
  • Look into defined benefit plans if you need to significantly boost your retirement savings.
  • Begin planning your withdrawal strategy and consider when to start taking Social Security benefits.

6 Self-Employed Retirement Plans to Consider

When it comes to planning for retirement, self-employed individuals have a variety of options to choose from. Each plan offers unique benefits and features designed to help you save for the future while taking advantage of tax benefits. Below is an overview of some popular self-employed retirement plans:

1. Traditional and Roth IRAs

A traditional or Roth IRA is a common choice and is suitable for individuals who are saving less than or up to $6,000 a year.

There are advantages to both – you will have tax deductions on a traditional IRA that you won’t have to worry about after retirement. With a Roth, there is no immediate deduction and withdrawals, after you retire, are tax-free.

2. SEP IRA

A Simplified Employee Pension (SEP) IRA works for those who are self-employed with few or no employees. The contributions for this in 2020 is up to 25 percent of compensation, or $57,000.

There is a $285,000 limit on compensation for 2020 ($280,000 for 2019). Employers must contribute an equal percentage of salary for each employee, and you will also be counted as an employee.

3. Solo 401(k)

The solo, or one-participant 401(k) plan is a traditional 401(k) that is for self-employed individuals who do not have employees. You can contribute up to $57,000 for 2020, and if you’re over 50, you have an additional $6,500 you can add as a “catch-up” contribution. 

There are a number of variables that can assist with your contributions, including the special rule for single-member LLCs and sole proprietors: You can contribute 25 percent of net self-employment income. Contributions are made pre-tax and any distributions after age 59½ are taxed.

4. Defined Benefit Plan

This plan is a fitting choice for self-employed individuals who are looking to put away more each year than your typical allowed contributions. For 2020, the maximum contribution is $230,000.

The contribution will be based on how much you will be receiving once you retire, your age and the expected return on your investments. Contributions are tax-deductible in most cases, and the distributions during retirement will be taxed as income.

5. Simple IRA

The Simple IRA (Savings Incentive Match Plan for Employees) is ideal for business owners who have 100 or fewer employees. For 2020, you can contribute up to $13,500, with a catch-up contribution of $3,000 if you are over the age of 50.

If contributing to another plan, your contributions cannot exceed $19,500. The contributions are deductible, but any distributions during retirement are taxed. Any contributions you make to an employee account is also deductible as a business expense.

6. Self-Directed IRA

A self-directed IRA (SDIRA) maintains the same eligibility and contribution limits as a traditional IRA. However, an SDIRA enables account holders to invest in alternative assets, such as precious metals, cryptocurrency and real estate.

With a self-directed IRA, you are the primary manager of your account, so you choose exactly where to allocate funds. However, with many unique investments available it’s essential that holders understand the regulations, knowledge and time commitment involved in their investments.

Being self-employed certainly has its perks, but it also oftentimes means making big decisions for your future on your own. Before deciding which self-employed retirement plan option to commit to step back and ask yourself what will work best for your unique situation, ideal future and risk tolerance.

Pros and Cons of These Self-Employed Retirement Plans

Each self-employed retirement plan offers unique advantages and potential drawbacks. Here’s a comparative analysis to help you understand the key factors to consider when choosing the right plan for your needs:

Traditional and Roth IRAs

Pros:

  • Ideal for those starting out or saving smaller amounts.
  • Traditional IRAs offer tax-deductible contributions, while Roth IRAs provide tax-free withdrawals in retirement.
  • Simple to set up and manage without extensive administrative responsibilities.

Cons:

  • Limited to $6,000 annually ($7,000 if over 50), which may not be sufficient for high-income earners.
  • Roth IRA contributions are subject to income limits, potentially restricting eligibility for higher earners.

SEP IRA

Pros:

  • Allows contributions up to 25% of compensation, with a maximum of $57,000 for 2020.
  • Easy to set up and administer, especially for those with few or no employees.
  • Contributions are tax-deductible, reducing taxable income.

Cons:

  • Employers must contribute the same percentage of salary for each eligible employee, including themselves.
  • Unlike some other plans, SEP IRAs do not offer catch-up contributions for those over 50.

Solo 401(k)

Pros:

  • Up to $57,000 for 2020, plus an additional $6,500 for those over 50.
  • Allows both employee and employer contributions, providing more flexibility.
  • Can borrow against the account balance if needed.

Cons:

  • More complex to set up and maintain compared to IRAs.
  • Only available to self-employed individuals without employees, except for a spouse.

Defined Benefit Plan

Pros:

  • Allows for significantly higher contributions based on desired retirement benefits, age, and investment returns.
  • Provides a fixed, pre-determined benefit in retirement.

Cons:

  • Requires actuarial calculations and can be costly to administer.
  • Requires consistent, high contributions, which can be a financial burden during low-income years.

Simple IRA

Pros:

  • Offers a simple way to save for retirement with employer matching contributions.
  • Less complex to establish and maintain compared to other plans.

Cons:

  • Limited to $13,500 annually ($16,500 if over 50), which may not be enough for higher earners.
  • Requires contributions for employees, which may increase costs for business owners.

Self-Directed IRA (SDIRA)

Pros:

  • Allows investment in alternative assets such as real estate, precious metals, and cryptocurrencies.
  • Same tax advantages as traditional IRAs.

Cons:

  • Requires more knowledge and involvement in managing investments.
  • Must comply with strict IRS rules to avoid penalties.

Conclusion

Planning for retirement as a self-employed individual is a crucial step toward long-term financial stability. By understanding the various self-employed retirement plans available, assessing your financial situation and retirement goals, and consulting with a financial advisor, you can create a tailored retirement strategy that suits your unique needs.

Whether you choose a Traditional or Roth IRA for simplicity, a SEP IRA or Solo 401(k) for higher contribution limits, or a Defined Benefit Plan for maximum savings, each option offers distinct benefits to help you achieve a comfortable retirement.

Schedule a complimentary financial assessment with Riverbend Wealth Management and let us help you navigate your retirement planning options.

Our team of professionals is here to provide personalized advice and support to help you make the most informed decisions for your unique situation.

This content is developed from sources believed to be providing accurate information, and provided by Twenty Over Ten. It may not be used for the purpose of avoiding any federal tax penalties.

Please consult legal or tax professionals for specific information regarding your individual situation. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security.

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