Retirement Planning for the Self-Employed

With advances in remote work and readily-available, affordable technology, it’s never been easier to start a small business, become an independent contractor, or otherwise be your own boss.

But self-employed individuals are responsible for many things that most employees typically don’t have to worry about. For instance, many employers often choose a retirement plan for their employees. All the employees need to do is sign up and choose a contribution amount.

Retirement decisions you make now can impact your personal life for decades. So, it’s essential not to overlook the importance of retirement planning. So, let’s explore how to prioritize retirement savings, understand the available options, and make wise financial decisions that ensure a secure future.

Prioritize Retirement Savings

“Pay yourself first.” This is the mantra we instill in our clients who own businesses. It might seem straightforward, but many self-employed individuals struggle with it. Remember: your business is your employment income source. Like any other worker, you deserve to reap the fruits of your labor.

We typically recommend that self-employed individuals incorporate a systematic plan that prioritizes retirement savings into their financial routine. This usually means creating a budget to ensure you can devote a portion of your income to retirement plans and savings accounts. Because each business is unique, the approach to saving for retirement should also be tailor-made. A financial advisor or CPA can help you strategize using various techniques. The sooner you start saving for retirement, the better positioned you’ll be in the future.

The Challenge of Automatic Deposits

For many workers, 401(k) plans offer a quick-and-easy way to save for retirement. The money gets automatically withdrawn from their paychecks and deposited into their 401(k). Many employers offer a 401(k) employer match plan, where employers can automatically contribute even more money to their retirement plans.

In short: 401(k) plans grow bigger with every paycheck without the account holder needing to lift a finger.

Unfortunately, most self-employed individuals either don’t have access to a 401(k) account or believe they don’t. Either way, they may feel locked out of the automatic growth a 401(k) offers.

But there is some good news: with the advancement of technology and services in the financial industry, automatic deposits into retirement accounts are becoming more accessible.

Even with a growing pool of options, setting up and implementing a savings strategy can be difficult. It takes time to shop around for a suitable account, submit the paperwork, and set up a depositing method. This is especially pressing when you consider that time is often the most precious commodity for business owners.

But ask yourself this: what if investing 10, 15, or 30 minutes now could provide a significant retirement benefit later? Framing the situation in these terms can make setting up a retirement plan more appealing. 

Retirement Plans Available for the Self-Employed

As a self-employed individual, you have a variety of retirement plan options. Each plan comes with different strategies and opportunities that must be tailored to your business and personal needs. The most popular options include:

  1. 401(k) plan, including solo 401(k)s
  2. SEP IRA
  3. Simple IRA
  4. State-run programs like Calsavers

The best part about the solo 401(k) plan is it’s available to those who only have themselves as an employee. But, before you decide between a solo 401(k) or one of the Individual Retirement Account (IRA) options, consider these three key features: fees, investment choices, and structure. 

For example, the 401(k) plan may have higher fees than other options. But its high annual contribution limit could make it your best strategy. That’s why we recommend sitting down with an advisor who can present the advantages and disadvantages of each option. This guidance can help you make an informed financial decision that aligns with your retirement goals.

Recommendations for the Self-Employed

Your decisions regarding your retirement plan can have an incredible impact on your life now and during retirement. They can affect how you save, altering how much money you need to budget for retirement. Your plan can determine whether you get tax benefits now or in retirement. And ultimately, your decisions directly affect how much money you’ll have when you retire.

Because of these reasons, we always recommend conducting thorough research before making any investment decision. Remember, saving for retirement is not just about setting money aside in a savings account. It involves a deeper understanding of financial products and a strategic approach to maximizing retirement benefits.

For example, a 401(k) plan can be costlier for business owners to set up than a SEP IRA or Simple IRA. However, the different accounts feature their own contribution limits and “employer match” options, which can significantly impact your savings capabilities. You’ll also need to consider your tax return; some plans provide a tax break now (traditional IRA), while others offer tax-free withdrawals in retirement (Roth IRA).

Remember that as a self-employed person, you are responsible for the combined employee and employer portions of the Social Security and Medicare taxes.

Consequently, it’s critical to factor this into your retirement planning.

Use a Retirement Calculator

Consider utilizing a retirement calculator. These calculators are usually free, can be easily found online, and can help you estimate how much you need to save each month to meet your retirement goals. Additionally, they can provide insights into how your current savings account balance might grow over time, considering the impact of compounding interest.

Moreover, many retirement calculators can factor in different scenarios, including changes in income tax rates and business expenses, allowing you to make more informed financial decisions. By leveraging these tools, you can better understand your financial health and future retirement needs.

Taking Advantage of Tax Breaks and Deductions

As a self-employed individual, understanding how to manage your tax return is crucial. Thankfully, the IRS offers several self-employed tax breaks to help reduce your taxable income. For instance, you can deduct business expenses, including office supplies, advertising costs, and even home office expenses. 

Additionally, contributions to a retirement plan can also reduce your taxable income. For instance, contributions to a traditional IRA or a 401(k) plan are typically tax-deductible, meaning they reduce your taxable income for the year you make the contribution.