Retirement Plans for the Self-Employed | Chandler & Knowles

Written by The Chandler & Knowles Team | Jan 11, 2021 2:15:00 PM

Sometimes, self-employed folks are so busy running their business that they forget to plan for retirement. If you are self-employed, don't let that happen to you. Those who work for large and medium-sized corporations are regularly reminded by their employers to contribute to their 401-K's, often with an employer match to boot. If you are self-employed, you have to remind yourself. Fortunately, there are some great self-employed retirement plans available to those in business for themselves. Let's take a deeper dive into them.

Solo 401-K

Did you know that 401-K's are not only available to employees but also to those in business for themselves? A Solo IRA is also known as an individual 401-K. This vehicle allows you to contribute funds from self-employed salary as well as self-employed profits from your business, up to a certain amount. For the tax year 2020, you can defer up to $19,500 in salary and the same amount for 2021. You can also contribute up to 25% of your net self-employment earnings, up to $57,000 for 2020 and $58,000 for 2021.

SIMPLE IRA

The federal government also allows you to invest in a special IRA, referred to as a SIMPLE (Savings Incentive Match Plan for Employees) IRA if you are in business for yourself. You are permitted to place all of your net earnings from self-employment, up to a maximum of $13,500 for tax years 2020 and 2021. If you are older than 50, you can contribute an additional $3000 per year as well. You can do this even if you fund a solo 401-K.

Simplified Employee Pension Plan (SEP)

Moreover, you may also be eligible to contribute to a SEP. You can establish this with IRS Form 5305-SEP. The government permits you to sock away as much as 25% of your net self-employment earnings up to $57,000 for the tax year 2020, and $58,000 for 2021.

Need Help Setting These Tax-Preference Plans?

These plans may be a bit more complicated for self-employed individuals compared to the same types of plans for company employees. Here is a 4-step process to help you in your planning:

Step 1: If you are unsure of what you are doing, consider working with a financial professional.
Step 2: Decide if you want to have a third-party administrator, such as a mutual fund family or a bank, for each of the plans you are considering. If you don’t you will have to do this yourself, which can be daunting for many.
Step 3: Come up with a written plan document that fits your personal financial situation and retirement goals.
Step 4: Make the contributions each year by the annual due date.

Non-Tax-Preference Retirement Savings Ideas

In addition, retirement for self-employed individuals may involve putting money away outside of your tax-deferred retirement investments. An excellent way to build wealth is to assemble a stock portfolio of dividend-growth stocks. These issues raise their dividends periodically, often every year. Over time, reinvestment of a continuously growing dividend stream contributes to compounding returns and a tidy sum over time.

Don't forget the potential of buying an annuity. These are contractual arrangements between an insurance company and a private individual, often an investor planning for their golden years. There are many types of annuities, but in many cases, an upfront lump sum is paid by the annuity purchaser to the insurer in order to receive future, or even immediate, payments at regular intervals. An annuity can guarantee you a fixed amount of income each month for the length of your retirement.