{"id":52381,"date":"2021-10-12T19:20:00","date_gmt":"2021-10-12T23:20:00","guid":{"rendered":"https:\/\/www.shortform.com\/blog\/?p=52381"},"modified":"2021-10-26T09:42:10","modified_gmt":"2021-10-26T13:42:10","slug":"self-employed-retirement","status":"publish","type":"post","link":"https:\/\/www.shortform.com\/blog\/self-employed-retirement\/","title":{"rendered":"How to Save for Retirement If You Are Self-Employed"},"content":{"rendered":"\n

How do you save for retirement if you are self-employed? What are some retirement account options available to the self-employed?<\/p>\n\n\n\n

If you are self-employed, retirement is a little trickier to plan. No human resources staffer is going to choose a retirement account for you, help you fill out the application, and set up automatic payroll deductions. It’s all a do-it-yourself job.<\/p>\n\n\n\n

In this article, we’ll take a look at the various retirement account options available to you if you are self-employed. <\/p>\n\n\n\n\n\n\n\n

Saving for Retirement<\/h2>\n\n\n\n

Business owners can take advantage of many different types of retirement accounts and benefit from many tax breaks. According to David Bach, the author of The Automatic Millionaire<\/em>, the simplest options to choose from are the Simplified Employee Pension (SEP-IRA) and the One-Person 401(k) Profit Sharing Account, otherwise known as the \u201cSolo 401(k)\u201d.<\/p>\n\n\n\n

<\/td>SEP IRA<\/strong><\/td>One-Person 401(k)<\/strong><\/td><\/tr>
How much you can contribute<\/strong><\/td>Up to 25% of your gross income or $53,000<\/td>-100% of your first $18,000-An additional 25% of your gross income if you use the profit-sharing plan-A combined total of $53,000<\/td><\/tr>
Example of tax-deductible savings for an annual income of $100,000 (tax-deferred until you take the money out)<\/strong><\/td>Total of $25,000 <\/td>-$18,000 into 401(k) plan-$25,000 into a profit-sharing plan-Total of $43,000<\/td><\/tr>
Best for you if:<\/strong><\/td>You don\u2019t have employees<\/td>Your employees are family members<\/td><\/tr><\/tbody><\/table><\/figure>\n\n\n\n

What You Need To Know About SEP IRAs and One-Person 401(k)s<\/strong><\/h3>\n\n\n\n

Bach briefly explains the benefits of both plans but doesn\u2019t elaborate on specific details you should be aware of to make an informed decision about which to choose. Here\u2019s some additional information about each type of plan:<\/p>\n\n\n\n


SEP IRA<\/a>: You\u2019ll reach the 25% or $53,000 limit if your income is more than $212,000 a year. In this case, you may want to look at multiple retirement accounts so that you can contribute more.All of your employees must be included in the plan if they are eligible. Bach claims this plan is best if you don\u2019t have employees because, if you intend to match employee contributions, you must pay the same percentage for each. For example, if you intend to contribute 10% of one employee\u2019s retirement contribution, you need to contribute 10% of every employee\u2019s contribution. The percentage you decide to contribute will impact your expenses. There are no catch-up contributions\u2014employees aged over 50 cannot make additional contributions.<\/p>\n\n\n\n

One-Person 401(k)<\/a>Bach claims that you can qualify for this plan if you only have family members working for you. However, that\u2019s not the case. You can qualify for this plan if you don\u2019t have employees or if your spouse is your only employee.<\/strong>While you can contribute a larger percentage of your income than you can for the SEP IRA, this does come with disadvantages. If your retirement funds total more than $250,000, you\u2019ll have to submit more paperwork to the IRS to justify these additional contributions.You need to contribute regularly for your plan to stay active\u2014if the IRS considers your contributions too low, they will discontinue your plan.<\/p>\n\n\n\n

Despite these caveats, both tax plans are often worth it\u2014Bach\u2019s right that there are huge tax-deductible savings, even if you don\u2019t make $100,000 a year. The average annual income of a self-employed person is $62,300 a year: This means that the majority of self-employed people could max out their pensions using either of these plans.<\/p>\n\n\n\n

How to Automate Your Retirement Savings<\/h3>\n\n\n\n

Once you\u2019ve chosen a plan, Bach suggests that you decide upon a salary amount that you will allocate for yourself and set up an automated system\u2014through your payroll company or checking account\u2014 to transfer contributions directly to your plan. <\/p>\n\n\n\n

If you have additional questions about self-employed retirement accounts, Bach recommends that you download the following pamphlets from the Internal Revenue Service<\/a>:<\/p>\n\n\n\n