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How To Choose A Retirement Plan When You’re Self Employed

How To Choose A Retirement Plan When You’re Self Employed

How To Choose A Retirement Plan When You’re Self Employed

It’s rewarding to be your own boss. Failing or succeeding on your own terms, making decisions solely, provides you with that peace of mind which a full-time worker earning steady income fails to enjoy. But saving enough for your retirement can be a challenging task if you’re self-employed or working as an independent contractor because your income fluctuates and become unpredictable each month. One of the most important things a self-employed owner should do is to set up a ‘retirement account’.

Your retirement plan must be flexible enough to help you save thousands of dollars for the future. Maybe at the start, you’re not able to sock away thousand dollars per year, but slowly and patiently you can save much for your retirement.

For those who’re self-employed, there are several types of tax-deferred retirement plans and the simplest option available to small owners is to set-up their own individual retirement account. But with a  $5,500 per year contribution (plus catch-up provision of $ 1,000 for those who are 50 and older), an individual retirement account (IRA) is not likely to offer you  handsome tax-deferred savings for your retirement. It will be more beneficial if you start out your own plan for comfortable savings. Once your company starts giving you profits, you’ll be glad for the ability to deposit your monthly savings into a tax-deferred account.

The Internal Revenue Service (IRS) has come up with different retirement plans for self-employed business owners. The key is to select the best plan for you from the start. When you’re ready to choose the right plan for your retirement, checking out these options is a must.

SEP IRA (Simplified Employee Pension-Individual Retirement Arrangement)

This type of account functions like an old IRA plan, in which business owners aim to provide retirement benefits for their employees and themselves. For employees, the percentage of contribution would be same as that of the employer, i.e., up to 25% of the employee’s salary. For example, employee wages total $50,000, so the employer could contribute $12,500 to the SEP-IRA account. Likewise, an owner could contribute up to 25% of his net earnings from their self-employment to a maximum of $53,000 in 2016. This type of arrangement is simple to monitor and its up to an employer how much to contribute each year.

SIMPLE IRA (Savings Incentive Match Plan for Employees)

This type of plan is simple to set up for small business owners and self-employed people in which they can contribute a SIMPLE IRA each year. A contribution of 100 percent of net earnings up to $ 12,500 (plus a catch-up contribution of $ 3,000 for those age 50 or older) can be made in 2016. The simple 2% or 3% contribution means an employer could contribute in excess of $ 12,500 to his retirement account each year.

 Solo 401 (k) (Self Employed 401(k) or Individual 401(k))

A qualified retirement plan of the USA which is set up for sole proprietors with no full-time employees or a company run by a married couple. On a tax-deferred basis, you can contribute to the account up to $ 18,000 (plus an additional $ 6,000 for those who age 50 or older). As a sole owner, you can also save and contribute up to 25% of your net profits up to a maximum annual contribution of $ 53,000 for the year 2016.

How To Know Which Retirement Plan Is The Best? 

“The better your self-employment income is, the better will be your retirement plan.” Or you can say, the plan that allows you to save a maximum of your income depends on your current earnings and anticipated future earnings. The SEP-IRA and  Solo 401 (k) plans require higher contributions as compared to a SIMPLE IRA, which is a flexible plan to save 100% of earnings rather than limiting you to 25%. So, if your earnings are low, Savings Incentive Match PLan for Employees might be a smart option. But if you’re an entrepreneur the other two options are best to save a six-figure income.

Adding Employees Can Make A Big Difference

If you’re a sole owner and planning to add employees in your business, then you’ve to change your retirement plan. A Solo 401(k) plan is for business owners who are working solely or with their spouse. Therefore, as an entrepreneur, you need to research on your current situation and future income and then take advice from a professional financial advisor regarding which savings option is best to allow you more savings for your retirement.

Posted in General News