Self-employed? You can still save for retirement

By Kevin Theissen
Skygate Financial Group LLC 

Can I save for retirement if I’m self-employed?

The answer is yes …

… but how do you do it? You don’t have an employer retirement plan or a department to assist you. The responsibility falls entirely on you.

Several surveys have shown that as much as 70 percent of small business owners and self-employed workers aren’t saving regularly for retirement, and almost 30 percent aren’t saving at all.

If you want to maintain your lifestyle in retirement, you should seriously think about making a commitment to prioritizing your retirement savings and put proper accounts in place to maximize the growth of future funds.

Prioritizing savings

One benefit of employer sponsored 401(k) plans is that funds are automatically deducted from each paycheck. Rather than setting aside whatever’s left over at the end of each month, these plans force employees to have a percentage of their money transferred directly into savings. This is essential in prioritizing retirement savings — ensuring that future funds don’t get spent on current bills or discretionary expenses.

As a self-employed person, you can do this same to make sure your retirement contributions don’t get spent in favor of current wants and needs. You are able to set up similar direct withdrawals by simply scheduling regular transfers from your checking account to your brokerage.

Plan options

One of the top benefits of traditional retirement plans is the tax deferred account option. Luckily, the self-employed have their own account alternatives with similar benefits — the SEP IRA, the Individual 401(k) and the SIMPLE IRA.

SEP IRA. A Simplified Employee Pension IRA allows you to contribute up to 25 percent of your net earnings from self-employment up to $53,000 annually (for 2016). The SEP IRA is flexible, low cost and easy to set up. There are no required minimum contributions and individuals can wait until their business’ tax filing deadline to pay into to the account- allowing for strategic last minute increased (or decreased) contributions based on annual earnings and tax liability.

Individual 401(k). Similar to traditional employer 401(k) plans; you can make salary deferrals of up to $18,000 per year (in 2016) on a pre-tax basis to an Individual 401(k), plus an additional $6,000 for those 50 and older. Unlike traditional 401(k)s though, Individual 401(k)s allow for an added contribution of 25 percent of net earnings from self-employment each year. While this plan allows for larger contributions, it is only available to business owners with a spouse and single business owners with no employees.

SIMPLE IRA. A SIMPLE IRA, or Savings Incentive Match Plan for Employees, is a traditional IRA for small business owners with 100 or fewer employees. This account option is best if you have a few employees or you plan on expanding your solo business and would like to offer prospective workers an added perk. The contribution limits max out at $12,500 (for 2016) — plus an additional catch up for those over 50.

The benefit of future savings

All three of these plans — Individual 401(k), SEP IRA and SIMPLE IRA — are pre-tax plans, meaning every penny saved for retirement is deducted from taxable income. Taking advantage of retirement accounts not only helps the self-employed in their financial futures, it keeps more money in your pocket today.

Put time on your side. Small business owners have a lot on their plates so it’s easy for long-term goals to be overlooked. Time is our most valuable resource and this certainly applies to saving and investing for the future. The time to plan for retirement is now, not a couple years before you retire.

Retirement planning is not limited to many years down the road however. Putting the proper accounts in place and making regular retirement contributions non-negotiable, even for the self-employed, can be effective in your current short-term cash flow and profitability.