How to Save for Retirement When Your Self-Employed?

November 1, 2010

How to Save for Retirement When Your Self-EmployedSaving for retirement is a challenge for many people. The financial demands and obligations of day to day life can leave some individuals feeling overwhelmed when it comes to putting money away for the later stages of their lives. Here is some retirement advice to get you started if you are self-employed.

For the self-employed, saving for retirement may seem like an even more daunting task. Most self-employed individuals do not go through the same payroll process that companies with many employees do, and they can’t participate in a retirement program that their employer sets up and administers for them.

As long as you are willing to educate yourself about the savings options available to you, however, being self-employed can actually give you greater flexibility and the potential to save more for retirement.

  • Individual Retirement Account. Don’t overlook using an Individual Retirement Account (IRA) or a Roth IRA as your primary retirement savings vehicle. The standard IRA contribution rules and limitations apply equally to those who are self-employed, as well as to those who work for others. This might be the easiest tax-favored retirement savings option for many self-employed individuals, because chances are you already have an IRA account, and you’d simply need to continue making contributions.
  • SEP-IRA. If you want the ability to contribute more towards your retirement than you can under a traditional or Roth IRA, or if you have a small number of employees in your business, then consider a Simplified Employee Pension Individual Retirement Account (SEP-IRA). Self-employed individuals may contribute up to 25% of their business’ net profit, up to a maximum dollar amount (in 2009, this maximum amount was $49,000), to a SEP-IRA. This greatly exceeds the amounts that can be contributed to a standard IRA (a maximum of $5,000 in 2009). The rules for calculating “net profit” are not entirely straightforward, but the main takeaway point should be that they allow you to contribute significantly more toward your retirement than you could with a traditional IRA.
  • Because SEP-IRAs are a particular type of IRA, you have the same type of flexibility in the kinds of assets you can invest in. Many brokerage firms (including discount brokers), and perhaps even your local bank can help you set up an SEP-IRA inexpensively and easily.
  • Individual or Solo 401(k). The individual 401(k) (sometimes called a “Solo 401(k)”) is not as well know as the SEP-IRA, but can be even more powerful than a SEP-IRA if you don’t have any outside employees. The contribution rules for individual 401(k) accounts allow self-employed individuals to contribute more of their earnings into the tax-favored account up-front. This can be a great feature for individuals who wouldn’t face the maximum contribution caps, but want to contribute a greater portion of their earnings toward their retirement savings.
  • Because individual 401(k)s are less common in the financial community, you may need to spend a little more effort looking for a bank or broker to help you set up the account.
  • Regardless of which savings vehicle you choose, the most important element of setting aside money for retirement is to start doing so as soon as possible, and to make it a habit that you stick with.

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