Are you self-employed and want to retire with enough money to travel the world? here are 7 smart tips on how to save money in retirement when you’re self-employed.
Many people dream of becoming independent and have come a long way to achieve it. dream. But self-employment has its drawbacks, and one of them is that you don’t get the 401k pension plan that was introduced for workers to save for retirement.
As a self-employed person, it would be really awful for you to retire to fall on you and you haven’t put off anything to take care of yourself during that time. According to a 2021 survey by the online community Manta, about a third of small business owners don’t have an IRA; and only 21% of them applied for pension funds to help their businesses.
That is why it is recommended that all self-employed workers explore other options that can help them save for their retirement, as they have no one to do so. Opening up retirement savings when you are self-employed is the right way to go. These plans will give you tax relief in addition to financial security after retirement.
The IRS offers several retirement plans that business owners and the self-employed can take advantage of. The key is to choose the right plan for your business model early on so you don’t have to go through the tedious process of changing it much later. Here they are, and you can choose more than one.
7 smart tips to keep your retirement working for yourself
- Traditional IRA
A traditional IRA is similar in nature to the 401 (k) that you get through an employer, except that you have to open an account yourself as an individual. This account contains funds and investments that you buy with your own contributions and your contributions are generally tax-free.
Once you open your account you will start making deposits and your investments will grow tax free. However, you will pay regular income taxes on the money you withdraw (called a distribution) from your account at the time of retirement. Style
The total amount you can contribute to your Traditional IRA is capped in 2021 at $ 5,500 per year for those under 50 and $ 6,500 per year for senior IRA holders. If your earned income for the year is less than this amount, you can only contribute up to the total amount you earned.
Be aware that you can only withdraw money from this account after you retire or reach age 70 and a half, whichever comes first.
2. ROTH IRA
The Roth IRA is a retirement account that holds funds and investments just like its traditional IRA counterpart. But while a traditional IRA defers taxes until the funds are withdrawn, Roth requires you to pay the taxes up front before you make a contribution.
The advantage of this approach is that at retirement age, you won’t have to pay tax on any of your overdrafts. Also, unlike a traditional IRA, a Roth IRA does not require withdrawals of money that you have invested in it on a specified schedule.
As of now, you can contribute $ 5,500 per year to your Roth IRA – or $ 6,500 if you’re 50 or older. There are tons of mutual funds you can choose from to diversify your investments evenly across these four categories: Growth, Growth and Income, Aggressive Growth, and International.
To be eligible to participate fully in the Roth IRA, you must:
- have earned income
- have revised adjusted gross income – total adjusted gross income (which is total gross income minus deductions) plus any tax-exempt interest income – that’s less than $ 189,000 for married couples filing together or $ 120,000 for singles.
Spouses can have two Rota IRAs even if one of the spouses is not working. You can deposit a maximum of two accounts, only $ 11,000 per year. For the vast majority of people, fully funding two Roth IRAs will be enough to meet the goal of investing 15% of their retirement income.
3. SIMPLE IRA
The Employee Matching Incentive Plan, or SIMPLE IRA, is an option for sole proprietorships and small businesses. You can set up a SINGLE IRA if you have a small business (typically 100 employees or less) and don’t offer any other retirement plan.
A SINGLE IRA allows you to contribute up to $ 12,500 per employee (or $ 15,500 if you are over 50) and an employer contribution corresponding to a percentage of your business’s profits.
When you create a SIMPLE IRA, all eligible employees, including you, open an IRA account. Employees can, at their discretion, contribute to their account from their salary, but not more than $ 12,500 in 2021. Employees 50 years of age and over can make additional contributions of up to $ 3,000.
If you are self-employed, you will make these contributions to yourself from your net income, and the same limit of $ 12,500 will apply, plus $ 3,000 if you are over 50. For this reason, SIMPLE IRA is arguably more suitable for a business owner who has employees and wants to reward their employees for their work.
4. Simplified pension for IRA employees (SEP-IRA)
This account works like a traditional IRA in that you make pre-tax contributions or receive tax deductions for your after-tax contributions. The SEP IRA 2021 allows you to deposit $ 55,000, which is up to about 20% of your business’s profits.
This type of plan is easy to administer and you can decide during the year or at the end of the year how much to contribute. However, if you add employees to the SEP-IRA, you will need to deposit the same percentage into their accounts that you put into yours.
Employees are eligible if they are 21 years of age or older, have worked for your business for at least three of the previous five years, and received at least $ 600 in compensation in the tax year.
Contributing to a SEP IRA will not only reduce your tax burden, but will also allow you to defer your tax deductions until you retire. SEP IRA is a great choice for your investment opportunity. You can open one at most banks, mutual fund companies, or brokerage firms.
5. Solo 401 (k)
Solo 401 (k) – sometimes referred to as Solo (k), Uni-k, or simple k – is simply a 401 (k) plan that is operated and used by one person. Solo 401 (k) is designed for sole proprietorships or businesses run by a married couple. As a business owner, you can create your own 401 (k) in which you are both an employer and an employee. When you create a 401 (k) solo and are self-employed, you can contribute as both an employee and an employer.
You can carry out optional deferrals (what an employee would do) up to 100% of your earnings (your self-employed earned income), up to an annual contribution limit of $ 18,500 in 2021. This limit drops at $ 24,500 if you are 50 years of age or over, because you are entitled to $ 6,000. additional as a catch-up contribution.
You can also make indiscriminate contributions (the type of contribution an employer can make for you if you work for someone) of up to 25% of your compensation. As a self-employed person, your remuneration corresponds to your income from activity (net income minus half of your self-employment tax and the contributions you have paid for yourself as additional deferrals).
One of the great things about Solo 401 (k) plans is that they save you more money than other alternatives, because as a self-employed person you can participate as both an employer and an employee. . But this has a downside: The Solo 401 (k) plan may require more administration than an IRA, especially if the plan is ready.
If you’re earning a lot, Solo 401 (k) might be a good option for you, but the downside is that if you have employees other than your spouse, you can’t use the plan.
6. Tax-deferred annuities
Annuities are another way a person can save on retirement because of the tax deferral and the various investment opportunities that it offers. Annuities are offered to individuals or couples through insurance companies. They are provided with a fixed interest rate, an indexed interest rate (based on the performance of a particular index) or a variable rate (linked to the performance of the market).
The funds that have been deposited into the annuity may then increase in deferred taxes, but they remain taxable after the funds are distributed during the retirement years. In addition to deferring taxation, annuities can provide guaranteed income to the account holder for a specified number of years or for life.
With tax deferred, you can defer your taxes on compound interest. Tax-deferred annuities are a good additional option for determining if you have other retirement savings accounts and have increased your annual contributions. You can add additional funds to your tax deferred plan.
In truth, annuities may not be suitable for all investors, and furthermore, annuities are only supported by the ability to pay for claims insurance. Company. The return on investment in this type of vehicle is not guaranteed.
In addition, finding an annuity with tax deferral and low fees will take some effort. Again, your contributions are tax deductible, so you cannot use them to reduce your tax burden. You also cannot touch this money in an emergency and cannot leave it to your heirs.
Saving for retirement when you’re self-employed can be intimidating, but you need to make sure you choose a plan that grows with the way you want your business to grow. You don’t have to complete the tedious task of changing plans as your business grows.
Depending on the circumstances, you will need to choose a plan that will save you as much as possible on your self-employment income. The Solo 401 (k) and SEP-IRA options have higher overall contribution limits. But if you earn a relatively low self-employment income, a SINGLE IRA is a better option, which allows you to save 100% of that income, rather than limiting yourself to 25%.
If you’re concerned about your ability to build a decent savings fund before retirement, you may need to consult with credit counselor to help find the best savings plan for you. The advice is free and can help you understand the steps to take to reach your goal of a comfortable, debt-free retirement.