Are you self-employed? Do you own a business? If so, you may be living the dream. You get to manage your own schedule and perhaps earn a living doing what you love. Your business is likely the result of years of hard work and planning.
As fulfilling as self-employment may be, it can also create difficult problems. That’s especially true when it comes to retirement planning. As a self-employed individual, you don’t have the benefit of employer retirement plans, such as a 401(k) or pension. Those plans can be valuable resources for traditional employees and help them accumulate assets for retirement.
Fortunately, you have other tools at your disposal. There are a number of retirement accounts designed specifically for self-employed individuals. In fact, some of them let you put away large sums on a tax-advantaged basis each year. Below are a few popular vehicles you can use to save for retirement:
The solo 401(k) operates similarly to a traditional 401(k), except it’s meant for companies where the owner is also the only employee. As the sole participant, you make both the employer and employee contributions. That allows you to put a significant amount of money into the plan each year.
In 2018 you can contribute as much as $18,500 to the plan, or up to $24,500 if you’re age 50 or older. That amount represents the employee contribution. As the employer, you can also contribute up to 25 percent of compensation. Your compensation is defined as your net income less one-half of your self-employment tax and contributions. Your total contributions can’t exceed $55,000.1
These are pretax contributions. That means they reduce your taxable income, which in turn reduces your tax exposure. The solo 401(k) helps you not only to save for the future but also to minimize your current taxes.
The Simplified Employee Pension (SEP) IRA is a popular savings tool. It’s similar to a traditional IRA, except it’s designed specifically for self-employed individuals and allows for higher annual contributions. Your SEP IRA contributions are tax-deductible, and distributions are taxed as income.
In 2018 you can contribute as much as 25 percent of your income to a SEP IRA, with a maximum contribution of $55,000. If you’re 50 or older, you can contribute as much as $61,000. Keep in mind that if you have employees, you’ll have to make contributions for them, too. Contributions are discretionary, however, so you can change the contribution amount from year to year based on your income and cash flow.2
Defined Benefit Plan
Want to put away more than is allowed in a solo 401(k) or a SEP? You may want to consider a defined benefit plan, which you can use alongside one of the other plans. You can design the plan to meet your specific needs and goals. The contributions are considered business expenses, so they’re tax-deductible.
There are some important things to consider before you open a pension. First, you have to commit to an annual level of funding. If your cash flow is volatile, the contribution commitment could put a strain on your finances. Also, you’ll have to offer participation in the plan to any employee you hire. That could get costly over time if you plan on expanding.
Ready to start saving for your retirement? Contact us today at Thomas Financial. We can help you analyze your needs and develop a strategy. Let’s connect soon and start the conversation.
Licensed Insurance Professional. This information is designed to provide a general overview with regard to the subject matter covered and is not state specific. The authors, publisher and host are not providing legal, accounting or specific advice for your situation. By providing your information, you give consent to be contacted about the possible sale of an insurance or annuity product. This information has been provided by a Licensed Insurance Professional and does not necessarily represent the views of the presenting insurance professional. The statements and opinions expressed are those of the author and are subject to change at any time. All information is believed to be from reliable sources; however, presenting insurance professional makes no representation as to its completeness or accuracy. This material has been prepared for informational and educational purposes only. It is not intended to provide, and should not be relied upon for, accounting, legal, tax or investment advice. This information has been provided by a Licensed Insurance Professional and is not sponsored or endorsed by the Social Security Administration or any government agency.
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