Whether you are an employee or a self-employed person, you should never neglect preparations for your retirement. Everybody grows old—including you—and preparing for retirement is something that needs to be done many years before retirement age. If you are employed by a company you are most likely already enrolled in a retirement plan and your company is most likely also contributing its share to your retirement benefits plan. However, if you are self-employed, you do not have such an almost-automatic and easy option. What options does a self-employed person have for retirement? There are several, actually. And, consistent with the spirit of self-employment, most of them are do-it-yourself. In this article, you will learn some of the ways to save for retirement if you are self-employed.
- Look forward. More specifically, have an idea of what your income and expenses will be when you reach retirement age. Prepare projections of these retirement income and expenses. Take into account the income that you get from pensions and social security, as well as expenses that tend to increase upon reaching retirement age (e.g., travel expenses, medical expenses, etc.).
- Open an Individual Retirement Account (IRA). An Individual Retirement Account can be availed of by employees and self-employed people alike. It is also very simple to set up and maintain. To open one, you need to do so via a financial institution. The financial institution will deposit money to your Individual Retirement Account (with your permission, of course). If you decide to open an IRA, you have several varieties to choose from: Simplified Employee Pension (SEP), Savings Incentive Match Plan for Employees (SIMPLE), and Spousal. In SEP, the upside is that your contributions are tax-deductible, your savings won’t be taxed until you withdraw from them, and the contribution limit is not as restrictive as other plans. The downside to SEP is that your savings are untouchable while you are enrolled in it. In SIMPLE, the upside for a self-employed person like you is that you can contribute up to 100% of your income (very useful for those whose income stream is low) and your contributions are tax-deferred. Or, you can set up a Spousal IRA, which will allow you to save a limited amount of funds to a personal IRA, provided that you and your spouse’s combined income is within a certain range.
- Consider 401(k) plans. You can opt for Solo 401(k), which is exclusively for self-employed persons who do not have employees working under them. The money you put into your account will only be charged taxes upon withdrawal; you are also allowed to withdraw from your savings at any time. A variation of Solo 401(k) is the Solo Roth 401(k). Your money is taxed first before it goes into the account, but will earn interest tax-free. Withdrawal from your savings, which is allowed anytime, is also tax-free.
Preparing for your old age begins today. The more you delay, the higher your chances of not having enough to get you by during your retirement age. There are many options for you to save for your retirement, even if you are currently self-employed. The important thing, though, is to start today.