Self Employed Retirement Plans – You Have Options…

When politicians bring up the possibility of raising the retirement age (as they frequently do), workers get nervous. Granted, it would give them more time to save, but they don’t want to work longer than they must in order to start using those hard-earned benefits.

A lot of self-employed individuals, on the other hand, aren’t quite as fazed by the talk. Because of the extra expenses and financial uncertainties involved in going solo, they pay little attention to the current “retirement age” because they don’t imagine they’ll be retiring.

The IRS, though, does provide retirement plan options for the self-employed. They don’t come with those nice employer-matched funds, but there are tax advantages. And they encourage sole proprietors to save something for retirement in case that working-forever thing isn’t possible because of:

  • Obsolete or no-longer-needed products and services,
  • Physical illness, and/or,
  • Peer pressure (why am I still working when all of my friends have retired?).

And if there are children and grandchildren in the picture, parents generally want to leave some money to them as a part of their legacy.

Complex Calculations

If you’ve been self-employed long enough to file at least one IRS Form 1040, you know how much more complicated tax preparation can be for you than for the typical W-2 worker. The Schedule C can be quite daunting, especially if you have to deal with topics like depreciation and the home office deduction. We recommend that you work with a financial advisor if you’re self-employed and must report on anything more than the most basic income and expenses.

Professional advice wouldn’t come amiss either if you’ve decided to start investing in your own retirement plan. As with other IRS tax-related vehicles, there are many rules and exceptions involved. Further, you (and your spouse) may be able to make contributions as both an employer and an employee because of your solo status. And there are some very sophisticated calculations required.

That said, here are options available to you as a self-employed individual:

  • Traditional IRS and Roth IRAs. This is probably the simplest route. You may already be familiar with the basic concepts. If not, you can find more information here.
  • 401(k) plans. These, understandably, are more complicated to set up and administer. Sometimes called “one-participant 401(k) plans,” they have rules and requirements that are similar to those managed for full-time employees.
  • Simplified Employee Pension Plan (SEP). SEP-IRAs adhere to the same regulations for investment, distribution, and rollover as traditional IRAs.

Full-time employees may be envious of your self-employed status for many reasons, but when it comes to planning for retirement, you’re at a disadvantage. Still, if you’re committed to being on your own for the rest of your working life and you feel strongly about saving enough money to fund some freedom as you grow older, now is the time to start. A good financial advisor can explain all of your options and help you find the best route to retirement.

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