Are you self-employed and wondering about your financial future? When you’re self employed, saving enough for retirement can be challenging because your income varies from month-to- month. This is especially true for seasonal businesses, like tax service firms.
When you’re self-employed, you don’t have the benefit of a 401(k) retirement plan to automatically deposit retirement savings every time you get paid. However you do have options on how you can save for your retirement. Read on to learn about 4…
The traditional IRA is an individual retirement account that offers tax advantages to savers. (It’s called a “traditional” IRA to distinguish it from a Roth IRA). If you contribute to a traditional IRA, you not only build a much-needed pot of money for retirement, you also get tax perks from the IRS for doing so.
In 2017, the IRA contribution limit is $5,500 or $6,500 if you’re 50 or older. Here are other key details on the traditional IRA:
If you believe your tax rate will go down in retirement — which is often the case for those further along in their careers or at a salary peak — you can save with a traditional IRA by putting off paying taxes until you qualify for the lower rate.
The SEP IRA is a type of traditional IRA for self-employed individuals or small business owners. (SEP IRA stands for Simplified Employee Pension IRA.) Any business owner with one or more employees, or anyone with freelance income, can open a SEP IRA; an employee is eligible to participate in a SEP IRA if he or she is at least 21 years old and has worked for the company in three of the last five years, and received at least $550 in compensation during the year.
SEP IRA contributions, which are tax-deductible for the business or individual, go into a traditional IRA held in the employee’s name. Employees of the business cannot contribute – the employer does. Like a traditional IRA, the money in a SEP IRA is not taxable until withdrawal.
One of the key advantages of a SEP IRA over a traditional or Roth IRA is the elevated contribution limit. For 2014, business owners can contribute up to 25% of income or $52,000, whichever is less.
As an employer, you don’t have to fund contributions every year. But when you do choose to make contributions, you must contribute not only to your own SEP IRA, but the SEP IRA of every eligible employee.
This is a special retirement account that you fund with post-tax income (basically meaning you can’t deduct your contributions to this type of IRA on your income taxes). And because every penny you stash in a Roth IRA is your money—not a tax-subsidized gift from Uncle Sam—you can tap into your contributions (but not your earnings on those contributions) any time, tax-free and penalty-free.
Roth IRAs make the most sense if you expect your tax rate to be higher during retirement than your current rate. That makes Roth IRAs ideal savings vehicles for young, lower-income workers who won’t miss the upfront tax deduction and will benefit from decades of tax-free, compounded growth. Roth IRAs also appeal to anyone who wants to minimize their tax bite in retirement, as well as older, wealthier taxpayers who want to leave assets to their heirs tax-free. (Unlike Traditional IRAs, there are no required minimum distributions on Roth IRAs, so well-funded retirees can leave their Roth money untouched if they don’t need it.) You can contribute to a Roth IRA at any age as long as you have earned income from a job.
This is another option perfect for the self employed. This is a great risk-free way to save money for retirement. With this type of savings you get a safe place to keep your money while you’re earning top rates. Because online banks don’t have the expense of maintaining branches like traditional banks do, they can offer annual percentage yields of 1% or more — about 14 times higher than the national average of 0.07%. Though 1% may not sound like much, it adds up. Max out your savings by looking for accounts with the highest yield, as well as great features. Some samples of this type of banks are the following. Marcus by Goldman Sachs – 1.50% APY American Express Personal Savings – 1.45% APY CIT Bank Premier High Yield Savings – 1.55% APY Barclays Online Savings – 1.50% APY
Here are some of the benefits on this type of savings accounts.
So that was 4 easy ways to start prepping for retirement as a Self Employed individual. SEP IRAs and other plans are a great alternative to an 401k.
Are you currently using or planning to use any of these? Let us know in the comments