One of the top mistakes that entrepreneurs tend to make is failing to set aside adequate money for retirement. This is common, but altogether not surprising, because if you’re self-employed, you know that every dollar counts, and it can, at times be more difficult to save than if you were more traditionally employed. This holds true even if your funds are tax-deferred. There are several reasons you may not be saving the way you should which may include:
- Focusing on funding or replenishing your startup costs
- Holding onto funds for fear of late payments from invoiced clients
- Tumultuous nature of business, as it ebbs and flows
- Failure to plan
- Hope that in the future, your assets will take care of your retirement
- Thinking you can live off your business funds after you sell
It’s great to hope for the best, but failure to plan for the future can absolutely be your downfall. You don’t want to leave things to chance in your old age that you could have taken care of when you were younger and had greater ability to. The great news is, if you’re self employed, you definitely have some lucrative options in order to invest in your retirement for the future! Let’s go over those three main options:
SEP-IRA stands for Simplified Employee Pension and is pretty ideal if you’re a solo entrepreneur. It’s a fairly simple, straightforward system to use, and you can contribute up to 25% of your solo-income to it. The biggest benefit to you here will be flexibility, because there’s no need to fund it until you’ve filed your taxes, so you can adjust what you add accordingly. One important thing to note is that this plan may not be ideal for you if you have employees.
This is a superb option if you want to set aside a good chunk of savings. As a solo employee with this plan, you can put in up to about $16,000 but as the employer, you can contribute even more: up to another 25%. If you’re over the age of 50, you’re able to contribute even more than that, upwards of $5,000 more in fact. Plus, with this plan, you benefit by having set up fees and annuals fees, as well as the ability to borrow a loan against your 401(k) in some cases, in emergency situations. It may not be the best option for you if you’re working several jobs, as there is a limit to how much you can save regardless of how many jobs you have.
A simple IRA is a fantastic option for you if you run a small business. The simple IRA was originally designed for companies with fewer than 100 employees and your contributions will tax-deductible. The biggest positive to going with this option is that it’s incredibly quick and simple. You also benefit by not having a percentage of income restrictions, and best of all: you are able to tax-defer until you are ready to make withdrawals. An important thing to note is that this may not be an ideal option for you if you plan to withdraw your funds early for any reason, as the fines for doing so will be higher than other retirement plans.
Being self employed is very liberating and a great achievement. It requires tremendous work and motivation and you are responsible for others who are your employees, so when there are options that will take care of you in your retirement, it is a pleasant confirmation that your hard work will not go unrewarded in your time of need and peace. Choose your option wisely and stay educated about your options to make the best decision for your future.