Saving for Retirement When You Are a Small Business Owner

Saving for Retirement When You Are a Small Business Owner

July 29, 2019

Owning your own business gives you freedom and control. Unfortunately, it also gives you financial concerns, such as managing your retirement fund. Read on to learn some important considerations about how a self-employed person can save for the future.

When you are self-employed, you must create and manage your own retirement plan. You don’t have the benefit of an employer’s plan administrator or matching contributions. It’s important to choose a good retirement plan for yourself, but it’s just as important to plan (and make) regular contributions to your plan.

Adopt the right attitude, and then the right plan. It’s easier as an employee to contribute a portion of each paycheck to a 401(k) or another workplace plan automatically. When you run your own business, it is your responsibility to enforce a contribution plan. Embrace the challenge! Set up an automatic biweekly or monthly electronic transfer to your plan from your checking account, and endeavor to maintain the necessary balance in your account for the transfers.

Your contribution percentage is crucial. Too low a percentage will shortchange your retirement, but you also don’t want to leave yourself perpetually short of money to live on. A reasonable initial target is the maximum annual contribution to an IRA. Divide the maximum by 12, and that’s the amount to contribute each month. For example, if your contribution limit is $6,000, consider monthly contributions of $500. If your income warrants a plan with a higher contribution limit, adjust your target upward. 

An IRA can be a good starting plan. You can open a traditional IRA and make tax-deductible contributions up to the annual limit. You pay taxes only on the amounts you withdraw. Naturally, you will want to be aware of early withdrawal penalties and required minimum distributions. You may also be eligible for a Roth IRA, in which you make after-tax contributions that grow tax-free. If you follow the rules, you won’t have to pay taxes on any withdrawals.

Other plans allow larger contributions. Popular plans for the self-employed include SEP IRAs, SIMPLE IRAs, and Solo 401(k)s. They allow larger contributions than a regular IRA, and each has its own rules concerning matters such as contribution requirements if you hire employees. A Solo 401(k) not only has the largest contribution limit, but it also offers superior protection from creditors. You can roll over money across any of these accounts, giving you the flexibility to change plans if that becomes advantageous.

When it comes to retirement plans, you have options. In addition to the plans I’ve already mentioned, you can also consider a pension plan or an annuity. If you’d like to re-appraise your retirement plans, call or email me for a full review. Together, we can evaluate your alternatives and find the one that best fits your current circumstances as well as your future goals.

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