Retirement Strategies and Advice for the Self-Employed

Written by , July 5, 2012

Retirement Strategies and Advice for the Self-EmployedBeing self-employed can be a very satisfying way to earn a living and develop your career. When you’re self-employed you have a greater degree of control over how hard you work, what types of work you do, what types of clients you work for, and the direction your business takes.

But there are some aspects of being self-employed that can be a bit challenging for many people. Self-employed individuals often miss having colleagues and the large office space resources that often come from working for someone else. Another challenge can be saving for retirement. Self-employed individuals don’t have company sponsored plans to join.

Here is some retirement advice and strategies to consider if you are self-employed.

  • Start Now. The most important aspect of doing your retirement planning when you’re self employed is an extremely simple concept, and one that also applies to individuals who work for someone else; start now. If you haven’t set up your retirement accounts, then do so immediately.
  • Contribute Every Year. Make sure to contribute every year, even if the amounts of your contributions aren’t as large as you’d like them to be. The best way to make sure your accounts grow as large as possible is to give them time to experience long term compound growth.
  • Consider a Traditional IRA or Roth IRA. When you’re self-employed you won’t be able to participate in any employer sponsored retirement plans. But you’ll still be able to open a traditional IRA or Roth IRA. Either of these IRA accounts can form a solid foundation of your retirement strategy.
  • Consider a SEP-IRA. SEP-IRA stands for Simplified Employee Pension IRA. The SEP-IRA is often used by small business owners to provide a retirement benefit plan that their employees can participate in. SEP-IRAs may also be used by self-employed individuals who have no employees. One big difference between SEP-IRAs and traditional IRAs is that the contribution limits for SEP-IRAs are potentially much higher. The maximum contribution for a self-employed individual is the lesser of $49,000 or 18.6% of their net profit for the year from their business. But this means that if your earnings are high enough you can save almost $50,000 per year toward your retirement.
  • Consider a Solo 401(k). Being self employed doesn’t automatically mean that you can’t take advantage of the benefits of a 401(k). It just means that you need to set up a 401(k) program just for yourself. Many investment brokerages and other financial companies offer solo 401(k) accounts for relatively low fees, and which provide a wide range of investment options. The current contribution limits for solo 401(k) accounts are up to $50,000 or $55,000 for participants over the age of 50. Again, these contribution limits are calculated on the basis of your self employed business income, so if your earnings are sufficiently high you can save significantly more each year toward your retirement than you could with a traditional IRA or Roth IRA.
  • When you’re self employed you’re going to be responsible for a lot of things that traditional employees don’t have to worry about. You’ll need to set up your own retirement plans, but you have a number of different strategies at your disposal.

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