How Can I Save for Retirement if I'm Self-Employed or Own a Small Business?
If you’re a small business owner or self-employed, you may not have a clear understanding of how you should save for retirement. The uncertainty is often due to the differences between being an employee and working for yourself. For example, if you worked for an established company, your organization might make the choice easy for you by offering a 401(k) plan that allowed for both contributions from you and matching contributions from your employer.
The good news is that self-employed individuals and small business owners have options when it comes to saving for retirement. For example, if you’re self-employed or a small business owner, you can set up an individual retirement account (IRA) with a financial institution and make regular contributions toward your retirement nest egg.
You can make contributions to a traditional IRA, where your contributions are tax-deferred until you start making withdrawals in retirement, or a Roth IRA, where you pay taxes now but your contributions can be withdrawn tax-free in retirement. (Be mindful that Roth plans have income limitations, although a Roth conversion is one way to work around the limits.)
Self-employed individuals and small business owners can set up other retirement accounts such as a solo 401(k) plan or a 401(k) plan for the company. One benefit is that 401(k)s have higher contribution limits. For 2019, individuals can contribute up to $19,000 to a 401(k), compared with $6,000 for IRAs. (If you have a solo 401(k), you can contribute an additional $37,000 as an employer profit-sharing contribution.) Plus, those age 50 and over can make catch-up contributions beyond these limits. For 401(k)s, the catch-up contribution limit is $6,000 compared with $1,000 for IRAs.
Other options include the SEP-IRA; as an employer, you would make contributions both for yourself and your employees. You could also set up a SIMPLE-IRA plan that allows for both employers and employees to contribute; however, you should be mindful of the mandatory contribution requirements.
Deciding on the right retirement plan depends on factors such as your income, savings needs, tax bracket, and number of employees. That is why we recommend you consult with an independent, fee-only financial advisor who can help you select the best plan based on your unique situation.
Schedule a complimentary, 15-minute call with a fee-only financial advisor today to discuss your personal situation.
Parkshore Wealth Management is a family-owned, independent, fee-only Registered Investment Advisor serving the greater Sacramento area with an office in Roseville, CA. We partner with financially responsible individuals and families who are eager to take positive steps that will allow them to use their money to build the life they desire. The firm is led by Harold Anderson, CFP®, and Daniel Andersen, CFP®, both members of NAPFA, the country's leading professional association of fee-only financial advisors.