3 Retirement Plans Every Entrepreneur Needs To Know About

Now That You're Self-Employed, How Do You Plan For Retirement?

Whether you are just entering the workforce as a newly minted entrepreneur or freshly self-employed after years of being in the traditional workforce, there's no doubt that you have a laundry list of things that need to get done.  From the daily machinations of setting up computer systems and phone lines for your business to the big picture plans for your new company, it probably seems as though there are not enough minutes or hours in the day.

However, when you are setting up your new business, one important piece of the pie is to set up your retirement account.  If you are a young entrepreneur in your 20’s or 30’s, retirement is probably the last thing on your mind.  You may not even be able to envision yourself retiring.  After all, you’ve only just begun! But it’s critical to have the right strategies in place for retirement.  After all, you don’t want to strike it rich with the next Google and then have nothing to show for it when you reach 65.

While you won't have a company plan to help make your decisions, there are a number of retirement account options for self-employed workers and small business owners.  Not only do these choices offer everything you need for your retirement plan, but there are a couple of options that you can utilize if you're a small business owner with employees. Offering a solid retirement plan can be a key component when it comes to attracting and retaining good employees.

 

Below we have identified the three most common types of plans that financial advisors recommend for entrepreneurs and small business owners:

1.  Simplified Employee Pension (SEP) IRA

For sole proprietors, this type of IRA is very popular.  It’s an easy account to open and annual account fees are low or even non-existent.

The rules on contributions are also simple – you can invest as much as 25 percent of your net income up to a cap that changes periodically to keep up with inflation. This year’s cap is $53,000. When you’re saving, the money is tax exempt, and the SEP IRA also offers some funding flexibility. It’s possible to wait until after you’ve filed your taxes to fund the account, so if your income is higher than you thought, you can make a larger contribution and lower your tax bill. If you have employees, they cannot contribute to the SEP IRA, but they can make their own contributions to a personal 401(k).

2.  Savings Incentive Match Plan for Employees (SIMPLE) IRA

If you’re currently running your own business but looking to expand, the SIMPLE IRA may be the account you need. With this type of account, you can continue investing even after you’ve hired an employee, but you have to match your employees’ contributions, up to 3 percent of their pay. There’s also a contribution limit of no more than $12,500 a year or $15,500 if you’re 50 or over.  Be aware that should you make a withdrawal from the account within two years of opening it, there will be a 25 percent penalty.  

3.  Individual 401(k)

For those hoping to build up their retirement account quickly and who have a lot of money to contribute, an Individual 401(k) is a popular option.

It works a lot like a Traditional 401(k), but your spouse can join the plan. Acting as your own employee, you’re able to contribute as much as $18,000 to your individual 401(k), or $24,000 if you’re over age 50. However, this plan is not available to additional employees.

When you’re the boss, you can contribute an additional 25 percent of compensation in addition to your employee contribution for a $53,000 maximum. Because there’s no restriction on those contributions, you can make them when your business is doing extremely well to make up for the years when it was harder to make such large contributions. If you have a spouse in the plan, it’s possible for the two of you to contribute a combined $106,000 or $118,000 if you’re both 50 or older. This also allows you to take advantage of the catch-up contributions.

 This type of account is also beneficial if you think you might need to take out a loan for your business. Rules will vary, but generally you can take out half of the account’s balance (up to $50,000) and take five years to pay it back.

Bottom Line

For the self-employed individual, these plans are relatively low cost and easy to administer. As a first step, you may want to consult with your financial advisor to determine which plan is right for you and your business. One major factor to consider is whether you need a retirement plan option that allows employees to participate.  

Looking for additional tips on retirement planning for entrepreneurs?  Download this free e-book today for valuable insights and advice!

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For valuable financial tools and information on how to set yourself up for a happy retirement, check these out:

Social Security OptimizerRetirement Calculator401k AllocatorMoney & Happiness QuizIs It Time For An Economic Shutdown? and You Can Retire Sooner Than You Think

Disclosure:  This information is provided to you as a resource for informational purposes only.  It is being presented without consideration of the investment objectives, risk tolerance or financial circumstances of any specific investor and might not be suitable for all investors.  Past performance is not indicative of future results.  Investing involves risk including the possible loss of principal.  This information is not intended to, and should not, form a primary basis for any investment decision that you may make. Always consult your own legal, tax or investment advisor before making any investment/tax/estate/financial planning considerations or decisions.