Self-Employed Retirement Plans
A retirement plan for self-employed individuals can be something that is hard to understand and is very rare that the retirement fund is fully funded by retirement.
Selecting a plan or an investment is very difficult for many people who are still unsure about how they are going to retire and how long they plan to be self-employed.
This one issue can almost derail people’s plans of being self-employed and maintaining that work freedom that they desire. When you are employed for a decent sized company, you end up working for someone else but you manage to get a benefit package, which consistently includes a 401k. This is a big deal and usually draws in people who wouldn’t normally want to work there. How do you get this same kind of security when working for yourself in an up and down economy?
When you’re self-employed you have a lot of the same choices for retirement, but many don’t take advantage of it. A whopping 40% of self-employed individuals in the US don’t have a retirement account. They were asked why they didn’t have a retirement account 38% said they don’t pull in enough money. Another 31% said their pay frequency isn’t regular enough.
What Can You Do?
There are numerous options for people that are self-employed. Firstly, you must remember to pay yourself first. Your first obligation is to you, not anyone else. Secondly, setting aside just a little bit each time you’re paid can really start setting you up for your retirement. There are multiple options for you. Let’s take a look at them.
Single-Participant 401k Plan
This 401k works just like the 401k you’d be offered at any company that offers a 401k as a part of their benefits package. There is one exception; you don’t have an employer matching these pre-tax payroll contributions. With the single-participant 401k, you get to be the employee and the employer. This permits you to put more in than if you were working for another company. In order to see what your contribution limit check out the table in IRS Publication 560. This option is one of the preferred retirement options for those who are self-employed. You should consider this option if you like simplicity and a retirement option that you and most financial institutions understand.
Simplified Employee Pension
A Simplified Employee Pension is very similar to an IRA. There is a big upside to it. It allows you to contribute more money to the account. Higher maximum contributions to the SEP mean more money for you when you decide to retire. You can contribute 25% of your income or the maximum amount set by the IRS. It is $54,000 for the year 2017. Your maximum contribution limit could be lower. The IRS Publication 560 can help you determine your contribution limits. Plan setup is very simple. First, you need to find a financial institution that offers SEPs and fill out the proper forms. They may hand you an IRS Form 5305 to fill out instead of their own institution-specific forms. The IRS Form 5305 tells you your benefits and the rules associated with the SEP. Contributions work best when you decide how much you want to contribute and have that set amount pulled from your income every month.
A Simple IRA is as easy as it sounds. It is another well-known retirement account that is a very easy to use and easy to contribute account. This account follows the same rules for investment, rollover, and distribution as a standard or traditional IRA. The contribution limits are different though. The IRS allows for you to put all of the net earnings up to $12,500 in your account. If you’re over 50 you can contribute $3,000 more.
Money Purchase Plan
The Money Purchase Plan is much like profit sharing when the employer funds the employee’s savings plan. Obviously, the amount that he employer puts in is related to the amount that the employee contributes. It’s very similar to at profit sharing in that aspect, but it needs annual contributions for the MPP annually. This is regardless of company performance. The contributions limit is again 25% of compensation, which is $54,000 in 2017 and can alter based on cost of living increases. Just like most retirement accounts, MPPs have the money grow tax-deferred. This makes the MPP just as viable of an option as most other investment accounts for retirement.
Profit Sharing is a popular option when you’re employed for another company, but what about when you are self-employed? This seems kind of fickle depending on the business that you are in but can work very well if you keep only yourself and a few others employed instead of expanding your number of employees. When you’re pulling in a profit, you can take some of that profit and put it into profit sharing account and let the money grown. Now, this doesn’t require an annual amount so you can ease your expenses during an off year. Obviously, you still want to do your best to fund the maximum contributions, but going into a profit-sharing agreement helps save you during economic downturns. This option could delay your retirement by a few years though so carefully consider this option before deciding on it.
There Are Numerous Options For You
There are plenty of options to set up a retirement plan for self-employed individuals. This takes careful consideration into seeing what is best for you. If you feel that you want a more standard or classic feel go for the 401k. If you only want to contribute when you make a certain profit, go for the Profit Sharing. It all depends on what works best for you, your family, and your future.
The best way to figure all of these out is to go to a financial institution and speak with a financial professional so they can inform you exactly what you need to know before you make the decision that can truly affect your future.