I have been self-employed as a freelance writer for six years now, and can say with certainty that being my own boss is pretty awesome.
On the other hand, the downside of being my own boss is the fact that I am solely responsible for my own retirement savings.
Unlike traditionally employed workers, I have no access to an employer-sponsored 401(k). Nor do I have access to an employer matching program to build up my savings even more.
Thankfully, there are several tax-advantaged retirement plans available for the self-employed. However, it’s entirely up to you to find the right plan and fund it regularly.
Here’s what you need to know about saving for retirement when you’re your own boss.
Know your self-employment retirement plans
Even if you don’t have an employer to set one up for you, freelancers and the self-employed still have several account options available for tax-advantaged retirement plans.
Three of the most popular options include the Self-Employed 401(k), the SEP IRA, and the SIMPLE IRA.
A Self-Employed 401(k), also known as a Solo 401(k) or Individual 401(k), is much like the 401(k) you might sign up for with a traditional employer.
You may contribute up to $18,000 of your salary per year pre-tax as of 2016 to these retirement plans. And like a traditional 401(k), you will not have to pay taxes on your contributions until you withdraw money from the account.
One major difference between the Self-Employed 401(k) and a traditional one through an employer is that you are allowed to contribute 25 percent of your business’s net earnings to it. This is in addition to your $18,000 salary deferral.
Between an $18,000 salary deferral and 25 percent of your earnings, you have a yearly cap of $53,000 that you can potentially contribute to your Self-Employed 401(k) as of 2016.
Also, your employer contributions are tax-deductible as a business expense. However, the IRS does require you to file a report with them annually if you have at least $250,000 in your account.
It’s important to remember that these 401(k) plans are truly for individuals. Only single business owners with no employees, or business owners who only employ a spouse, are eligible for them.
SEP IRA stands for Simplified Employee Pension Individual Retirement Account. It can be a great option for self-employed individuals with few or no employees.
With a SEP IRA, you are making contributions solely as the employer. And like a Self-Employed 401(k), your contributions are tax-deferred, or pre-tax for these retirement plans.
The contribution limit is set at 25 percent of your net earnings from self-employment, with an annual cap of $53,000 as of 2016. SEP IRAs are very easy to set-up by yourself with the IRS or a financial institution. Plus, there are no required minimum contributions.
One of the most helpful aspects of the SEP IRA is that the deadline for contribution is your business’ tax filing deadline. This gives you a great deal of flexibility for strategically increasing or decreasing your contributions based on your earnings and tax liability.
If you have any employees, you will have to include them in the SEP IRA that you set up. Keep in mind you are not allowed to contribute a higher percentage to your own account than you contribute to your employees’ accounts.
A Savings Incentive Match Plan for Employees, or SIMPLE IRA, is designed for business owners who have 100 or fewer employees.
It’s the best choice for self-employed individuals who either already have several employees or who plan to expand in the future. You can contribute up to $12,500 as of 2016 to a SIMPLE IRA.
Since these retirement plans are geared towards small business owners with employees, you must make contributions on your employee’s behalf regardless of your employee’s own contributions.
You have the choice of either contributing a flat two percent of your employees’ pay to the account or doing a dollar-for-dollar matching of their contribution up to three percent of their pay. If you choose the matching option and they do not contribute, then you do not have to, either.
The other thing to know about SIMPLE IRA contributions is that they count against any 401(k) contributions you might be making.
For instance, if your self-employment gig is a side hustle and you also have a traditional 401(k) with your main job, any contributions into your SIMPLE IRA will count against the $18,000 you could otherwise put into your 401(k) that year.
Prioritizing retirement savings
For many of us doing the self-employment dance, the contribution limits to the above retirement plans may seem laughable.
It can be tough enough to pay taxes and make it through the lean months each year. It may be even more difficult to set aside thousands of dollars for retirement annually.
And we’re not alone in this struggle. According to a 2013 TD Ameritrade survey, 40 percent of self-employed individuals weren’t saving regularly for retirement, and 28 percent weren’t saving at all.
1. Put a percentage aside every time you get paid
Saving for retirement is an important part of creating a killer solo career. And the easiest way to do that is to automate your savings.
While the self-employed may not receive a regular paycheck and can’t make regular contributions accordingly, there are still ways to automate your savings.
Each time I receive a check or payment from a client, I transfer 20 percent of it to a savings account.
Once I have reached $2,000 in that savings account, I transfer it into my Self-Employed 401(k). It’s just part of how I operate, so I don’t even miss the 20 percent since I don’t count on it.
2. Transfer funds to your retirement account monthly
Though you may not be able to automate the specific amount you will set aside, you can automate the decision process.
Schedule a day each month to transfer funds to your retirement account, at which point you can determine how much you can afford to set aside for retirement that month. Without that scheduled date, you’re less likely to make any contributions at all.
Save for retirement like a boss
It may be tough to save for retirement when you are the boss, employee, and chief financial officer.
But if you’ve conquered the self-employment realm, you can certainly start treating your retirement plans with the respect they deserve. You’ll thank yourself in the long-run.
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