Running a business or being self-employed means a great deal of freedom, but with that freedom comes responsibility. And one of the most important responsibilities is to make sure that you are properly saving for retirement. You cannot just count on your employer to set up your 401(k), but must now handle it yourself. But this is not all bad, as being self-employed grants additional flexibility as you can now use plans which you cannot as an employee. Here are some of the key plans to consider as well how tips for how to save and enjoy a long retirement. Traditional IRA/Roth IRA While you can use additional retirement plans when you are self-employed, that does not mean you should eschew an IRA. An IRA is simple to set up, may be familiar to you, and can be used regardless of whether you have employees or not. The catch is that you can only contribute up to $6,000 per year, but that may be enough depending on your financial circumstances. There is the age-old question of whether it is better to use a Roth or traditional IRA, with the ultimate answer being that it depends on your financial circumstances. SEP IRA A SEP (simplified employee pension) IRA is easy to set up, needing only an additional form on top of the usual forms needed for a traditional IRA. It is a good choice for freelancers as well as small business owners with zero or only a few employees. In a SEP IRA, you can contribute the lesser of up to 25% of your annual compensation or $57,000, which means that you can contribute quite a bit more compared to traditional IRAs. This contribution can be deducted on your tax return, which means greater savings. But if you have more than one or two employees, a SEP IRA can be difficult to maintain. You must make contributions to your employees that are the same percentage as the ones for yourself. For example, if you contribute 25% of your annual income, you must contribute 25% of your employee’s annual compensation to his SEP IRA as well. Simple IRA This IRA is good for small businesses, because it places some of the contribution burden on employees as they own the accounts. Employees can defer up to 3% of their salary, which the employees must match or pay 2% for every eligible employee. Simple IRAs are better for small businesses than a traditional 401(k) as they are much easier to administrate, but only businesses with 100 or fewer employees can make use of them. Furthermore, employees are subject to a 25% penalty if they choose to withdraw funds in the first two years, meaning that they cannot put it in another retirement account. Health Savings Account This is not strictly speaking a retirement plan, but many people view HSAs as a de facto retirement plan, especially since health expenses are a major part of saving for retirement. An HSA allows you to stockpile […]
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