5 Retirement Planning Tips When You’re Self-Employed

Whether you are newly self-employed or have been self-employed for a number of years, it’s essential that you save for retirement.This comprehensive guide will give you 5 retirement planning tips for the self-employed.

Why Retirement Is Different For The Self-Employed

When you are self-employed you are responsible for everything including retirement planning. Whilst you are running your business, it is easy to put off investing for the future. Don’t fall into the trap of putting it off until tomorrow. Start planning now to make sure you will be comfortable in your retirement.

The number of people working on a self-employed basis grows each year. Currently, it’s estimated 30% of Americans are self-employed. Regardless of how much you earn right now, you should start planning for your retirement.

You may not be able to save large amounts yet, but as your business grows you can contribute more. By creating a plan now and sticking to it, then you will be able to hit your retirement goals with ease!

1. Choose A Self-Employed Retirement Saving Plan

Self-employment comes with many freedoms. However, there is no excuse for not saving for retirement. If anything, it becomes more important as no one else will do it for you.

First, decide how much you want to save each year.

Next, you need to decide where to put your money. As a self-employed person, you have many options to choose from. Here are 5 retirement plans that may be suitable for you.

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Solo 401(k)

A Solo 401(k) is a great plan for people that want to save a lot for retirement or that want to contribute more some years than others depending on how good business has been.

You can take this plan provided you have no employees other than a spouse. If you employ your spouse, then they can contribute up to the same amount as you, effectively doubling the contributions.

Solo 401(k)s can be opened through online brokers. Once you have more than $250,000 in your retirement account, then you need to file paperwork with the IRS each year.

Traditional or Roth IRA

An IRA is one of the easiest ways for a self-employed person to begin saving for retirement. It doesn’t have any special filing requirements and can be used whether you have employees or not.

A Roth IRA is often the better option for a newer business but to be eligible your income can’t be over a certain amount. If you are earning a low enough amount, then a Roth IRA may be better as there are no immediate tax deductions.

An IRA can be opened in minutes using an online brokerage and you can move your old 401(k) into an IRA as well.

SEP IRA

A SEP IRA is easy to manage with minimal administration required. You also don’t have to report to the IRS each year. SEP IRAs do offer some flexibility as they don’t require that you contribute each year.

One drawback of a SEP IRA is that the business owner must make equal contributions for any employees. The amount must be contributed based on a percentage of pay equivalent to the one you make for yourself. This means a SEP IRA can be expensive if you have a number of employees. A SEP IRA cannot be used just for yourself, you have to contribute for all eligible employees.

The rules for contributing for all employees make this plan better for small business owners that have no or very few employees.

SEP IRAs can be opened with most online brokers.

SIMPLE IRA

For owners of midsize companies with no more than 100 employees, the SIMPLE IRA is a good option. It’s easy to set up and the accounts belong to the employees.

The contribution limits of a SIMPLE IRA are lower than a solo 401(k) or SEP IRA and you may have to make contributions to employee accounts. If you have a large number of employees participating in the scheme, then this can get expensive!

A SIMPLE IRA is not as flexible as other plans. In the first 2 years, it can’t be moved to another retirement account. Also, if a withdrawal is made in the first 2 years, a 25% penalty will apply. If you make an early withdrawal before the age of 59 1/2 it will be taxed as income and be subject to a 10% penalty.

2. Create A Budget

To be financially healthy and hit your financial goals you must have a budget. A budget allows you to stay on top of your expenses and helps you know exactly how much you have spare to save.

When creating your budget remember to include every expense including variables like spending on entertainment. As part of making a budget, you should identify your goals including your retirement goals. Knowing how much you want to save will help you to create a realistic budget.

Once you have decided your goals and know your expenses, you can make your plan. Remember to review your budget on a regular basis. If you can save money anywhere, then consider putting any savings towards your retirement savings.

3. Automate Your Savings

Many people face a challenge when trying to save money. That challenge is remembering to save the money before it gets spent!

If you automate your savings, then you are ensuring the money goes to your retirement fund. No longer will you have to worry about overspending as not only have you made a budget you can stick to, but your money earmarked for retirement is automatically transferred.

Once this has been running for a while you won’t even notice the money going every month.

4. Consult A Professional Financial Advisor

Speaking to a professional financial advisor can be a fantastic way of ensuring you make the right choices for retirement planning when your self employed. A good financial planner will help you create a plan to achieve your financial goals. This includes retirement planning.

A financial planner will be able to help you calculate how much you need to save, what type of retirement account to use, and help with everything else relating to your finances.

To consult a financial advisor, there may be a fee although some may offer limited advice for free. Fees will vary and you could be charged an hourly rate, a commission, a one-off fee, or a combination.

5. Start A Side Hustle To Boost Retirement Savings

A side hustle or side gig is a way of earning money in addition to your normal employment. Many people choose to work a side gig as the extra money can be used for many things including paying off debt, investing, and building savings.

In this case, as we are talking about retirement planning, extra money earned from a side gig could be put towards your retirement fund. This means you could save more money and grow a bigger fund quicker than planned!

Thanks to the internet it has never been easier to start a side hustle. Ideas include starting a blog, freelancing, driving for Uber, or teaching online. Think about your skills and search online for suitable side hustle ideas.

Final Thoughts

It’s never too early to start retirement planning when you are self employed. In fact, if you haven’t started yet, then you should get started now!

Author Bio:

Hey, I’m Chris. I have a degree in Business Economics from the University of Liverpool, own a small fast food business and run LifeUpswing.com. I will help you to make money, save money, and think about money in a way that will give you back your freedom.

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