Retirement Plans for Sole Proprietors
It’s expensive to be a sole proprietor. If you’ve been one for any length of time, you already know that. From the self-employment tax to the business insurance, computers and other technology, office expenses, and health insurance– the expenses seem endless!
Sure, you can get some of those expenses back by documenting it on your Schedule C, but you still have to pay for a lot of things that full-time employees don’t. Plus, you don’t get those nice employer match contributions to your retirement plan that many workers get these days.
Retirement plans are usually easier if you’re a full-time employee, but if you’re self-employed, don’t think they’re not an option for you! You can absolutely set up a retirement plan if you’re self-employed! The IRS offers a handful of options.
Yes, you can set up one of these even if you’re not a full-time employee! They’re sometimes referred to as “one-participant or solo 401(k) plans” (though your spouse can also participate). And since you’re both the employer and employee, you’re allowed to make contributions as both.
These solo plans work similarly to employer-provided 401(k) plans; they have comparable rules and requirements. And they’ re complicated.
For example, you can make elective deferrals of up to 100 percent of your earned income until you hit the annual contribution limit of $18,000 in 2016 (or $24,000 if you’re age 50 or older).
Warning: The IRS definition of “earned income” for self-employment is a complex concept that requires some advanced calculations. If you want to explore this option, you should have your accountant (one like me) work with you on it from the beginning. You want to be sure that you don’t exceed the maximum contributions as both employer and employee!
Simplified Employee Pension Plan (SEP)
If you’ve ever worked for another company as an employee, you may already be familiar with this concept. SEPs are traditional IRAs (“SEP-IRAs”) that employers can set up for employees. Employers can also contribute to them. They’re bound by the same rules for investment, distribution, and rollover as traditional IRAs.
Here, too, you can make contributions as both employer and employee. And like one participant 401(k)s, the calculations required are daunting, but don’t worry! We can help you figure it out.
Traditional IRAs and Roth IRAs
These options are absolutely available for the self-employed. Each has its own tax implications, and they’re not as difficult to understand and implement as SEP IRAs and solo 401(k) plans.
If you’re feeling overwhelmed by the IRS language, don’t worry—I can help!
Why Should You Plan for Your Retirement?
If you’re self-employed and plan to be for the rest of your career, retirement planning is so important.
We often hear people say that they just plan to work forever, so they don’t need to have a sizable nest egg ready for retirement.
And yes, this will work for some, but there are so many ways that circumstances can change, and you don’t want to be left in a sticky situation! You want to be able to enjoy your
retirement after working hard. Retirement planning now will help you be prepared for the future.
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