Saving for Retirement When You Are Self-Employed

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Retirement Plans for the Self-Employed

More Americans are becoming entrepreneurs now than during any time in the last decade and a half. Each month, over 560,000 new businesses pop up around the country, and although being your own boss can be great, there are some downfalls, too. 

The biggest mistake many entrepreneurs make is not properly planning for retirement. It is hard to set aside money when you are self-employed, especially if you worry that clients won’t pay on time or your business will not grow as fast as you would like it to. Fortunately, saving for retirement is not as difficult as it may seem for self-employed people, and Uncle Sam has a number of plans that offer tax-favorable accounts for retirement savings. If you have been more focused on putting funds into your start-up than your retirement, it is time to make a change now. Here are two great options for self-employed owners of small businesses that can help get you started:

Simplified Employee Pension (SEP IRA) 

This plan offers an easy way to set aside savings for retirement. You can add up to 25 percent of your net income to the limit of about $50,000, and it offers flexibility. You don’t have to add money to the retirement account until you file your taxes, so you can make a greater contribution during a good year and cut your tax bill, or you can feel free to reduce your contribution to the fund when times are tough. 

If you have employees, instead of contract workers, the plan may become costly in the future because the funds you add to your SEP IRA are counted as contributions from an employer, which means you have to match their percentage contributions in certain circumstances. 

A Solo 401(k) 

If you are a business owner who can afford to save a large percentage of your income, this plan may be for you. You can set aside nearly $17,000 as an employee and contribute more as an employer until you reach the limit, which is nearly $50,000. You can add even more if you are over the age of 50. 

The generous contribution limits make this plan a very attractive one, and annual fees are typically low. Loans can also be taken out against the solo 401(k), which can come in handy if you need funds during a bad year. You may borrow up to half of your balance and usually can take as many as five years to repay.