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Navigating Retirement Savings When Self-Employed


If you’re self-employed or even own a small business with employees of your own, planning for retirement can present serious challenges. That’s because self-employed individuals are subject to complex taxes, don’t have the benefits of automatic employer withholdings, and typically don’t have access to a sponsored 401(k) or pension.

How underprepared for retirement are self-employed individuals and small business owners? In one survey of small business owners of all ages, 75% had less than $100,000 in savings. Considering the basic costs of living, even with support from social security, this is far from enough.  

Still, there is some good news. Despite several issues, with the rise of the gig economy, self-employed individuals and small business owners are making use of a growing number of retirement savings options, and they’re growing into savvy savers. And, with the help of financial planning professionals, you too can secure your financial future.

Basic Barriers To Retirement Savings.

For self-employed individuals to successfully plan for retirement, the first step is to identify existing barriers to savings. These include learning to budget despite a variable income and successfully allocate savings for taxes. The self-employed tax rate is 15.3%, and while self-employed individuals have access to several useful deductions, when you’re busy chasing down client payments, managing employees, and dealing with cash flow challenges, it’s hard to set aside such a significant part of your income – never mind saving more.

Retirement Savings Basics.

Once you know what’s standing in the way of your ability to save for retirement, it’s time to assess the options that are available to you. If you don’t know where the start, a financial planner can help you develop a retirement investment strategy, including different types of IRA accounts and self-employed 401(k)s. Depending on your personal needs and your savings goals, you can mix and match different types of accounts.

Looking beyond traditional and Roth IRA offerings that are available to anyone, small business owners should explore whether the SIMPLE IRA is a good option for them. The SIMPLE IRA, short for Savings Incentive Match Plan for Employees Individual Retirement Account, allows both small business employees and their employers to contribute to employees’ retirement savings. As the employer, you can choose to make matching contributions or elective contributions to support your employees’ efforts to save for their retirement.

Another good retirement savings option for self-employed individuals is the SEP IRA. Unlike a traditional IRA, SEP IRAs allow you to contribute up to 25% of your annual income, giving them a potentially much higher cap than traditional IRAs; In 2019, the cap will be $56,000 compared to a normal IRA cap of $6,000 beginning in 2019 for individuals under age 50. If, however, you are providing SEP IRAs to employees, the contribution requirements may be too high to make their use feasible.

Finally, as a self-employed individual, you have the option of opening a solo 401(k). These are quite similar to SEP IRAs in that they have a higher cap than a typical IRA – up to $18,500 annually for investors under age 50. However, you cannot open a solo 401(k) if you have employees; it’s only available to individuals and business owners and their spouses. The reason that the cap is so much higher is that you are able to contribute as both the employee and the employer.

While it may be more difficult for self-employed individuals to save for retirement, with proper guidance, you can learn to utilize the many different tools at your disposal. Ultimately, while you may not have outside support to fund your eventual retirement, you do have more resources than you realize to ensure your future financial stability.


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