A simple answer would be by building an empire and not looking back. However, not all self-employed and small entrepreneurs can turn their businesses into million-dollar powerhouses. For most of them, the problems of healthcare, paid vacation leaves, and retirement are puzzles that they need to solve on their own. Usually the retirement options are last on the list since in your youth you are more focused on creating value right now than thinking about when you’ll be over 70.
Since self- employed make up an essential part of the active population there are numerous options to choose from. These include:
- Solo 401(k)- this is the choice of solo business owners who can also include a spouse. You won’t be able to match the employer’s contribution since you are both, but you can put up to a quarter of the earnings in this direction.
- SEP IRA (Simplified Pension IRA)- great for solopreneurs and small businesses since there is no minimum contribution so that you can have different inputs, according to your level of earnings.
- SIMPLE (Savings Incentive Match Plan for Employees)- this is the least used option since it comes with the obligation for the employer to pay 2% of the salary under IRS penalty for default.
The Beauty of Roth
Most savings towards pensions are tax-exempted at the moment of the deposit. That only means that the beneficiary, either the original deponent or heirs, will pay taxes on the withdrawal. This postponing can be uninspired and result in a smaller total amount than if the charges would have been paid before.
This is exactly what a Roth offers. The money in a Roth account, either a designated Roth contribution or a Roth IRA have already been taxed once as income. That means that all the interest will be added to the final amount and given enough time it could end consistently larger.
What Is a Roth IRA? It is a retirement account that you can save yearly up to $5,500 ($6,500 if you are over 50 years old) from already taxed funds. Since the sum is not too high, it is more of an additional instrument than your primary savings tool for retirement, but it could make the difference between traveling locally and internationally in your silver years.
The real plus is that if during retirement you end up in a higher tax bracket you don’t have to worry about it and can just enjoy the fruits of your work.
As tempting as it might sound, a Roth IRA account is not available to everyone. There is an earnings limit currently set at $ 118, 000 for single tax filers and head of households and $186, 000 for married filing jointly. After these limits, there is the opportunity to make smaller contributions, and for high earners ($133,000 – single, respectively $196,000 married filing jointly), this type of IRA is not available.
Self-employed who have employees of their own are responsible for their people’s retirement plans. For companies that are larger than a husband and wife who would typically choose a Solo 401(k), the choice is between a SEP IRA and a SIMPLE IRA. The SEP is the sole duty of the employer and taking the maximum 25% for your salary means that you should give the same right to each employee.
The key takeaway here is not to wait for too long before setting up a retirement plan. Taking advantage of all existing options and even combining them is the best decision you can make in a world filled with uncertainty.