When you are self-employed, retirement planning can feel like an afterthought. It’s easy to feel like there aren’t enough hours in the day to tackle everything you need to do as an independent business owner. Even so, creating a solid retirement plan is essential. A strong retirement plan can help you save for your golden years, reduce your tax burden, and increase your income during retirement.
Working as a self-employed individual has its own set of benefits and pitfalls. Here are some things to keep in mind about creating a solid retirement plan that works for you.
Meet with a financial advisor
If you are self-employed, you’re used to doing a lot on your own, including planning for retirement. But there’s no one-size-fits-all solution. That’s why meeting with a financial advisor can help you create a personalized plan that works for you.
A financial advisor can help you understand your options and make informed decisions about your future. They also help identify areas where you can improve your financial situation, such as reducing your tax burden or increasing your income during retirement.
Know your options
Depending on your situation and financial goals, a few different retirement plans might be right for you, including traditional IRAs, SEPs and Solo 401(k)s. Traditional IRAs allow you to make pre-tax contributions and have tax-deferred growth.
You may qualify to make “SEP IRA Contributions” or “Solo 401(k) Contributions” as an alternative retirement plan. SEP IRAs are available to self-employed individuals and individuals employed by small businesses. SEP IRAs allow you to make pre-tax contributions and receive tax deductions for those contributions.
If you’re an independent contractor or self-employed, you can open a solo 401(k) and make pre-tax contributions to your retirement plan. Solo 401(k) contributions are generally made with after-tax money, but any investment gains will be tax-free.
Decide on a strategy
You must consider federal and state income tax, Social Security, and more. Once you understand your options, you can start taking steps to ensure your retirement plan is set up and ready to go. Make sure you have an Individual Retirement Account (IRA) or 401(k) and contribute enough to get the tax benefits. You may also consider setting up a SEP IRA or a Solo 401(k) as an additional retirement plan.
Additionally, given that you can get a tax break by structuring your business as an S-Corp and assigning yourself a reasonable salary, you could very well get into a lower tax bracket.
It can be challenging to create a solid retirement plan as a self-employed individual, but it’s essential. By meeting with a financial advisor, understanding your options, and deciding on a strategy, you can create a retirement plan that works for you.