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How to Save for Retirement When You’re Self-Employed

How to Save for Retirement When You're Self-Employed - TaxAct Blog

Being your own boss comes with a variety of perks. But it also forces you to handle work typically taken care of by a human resource or finance department.

For example, you have to find your own health care plan and deduct taxes from your paycheck. And, when it comes to saving for retirement, it’s your responsibility to start a savings fund.

Here are a few things to keep in mind as you plan for your retirement while self-employed.

You’re in charge of your future.

As the boss, it’s easy to get distracted from your financial needs. Many times you’re too busy concentrating on the success of the business to remember to save for life down the road.

Or, maybe you put too much trust in the idea that you’ll eventually make it big and become incredibly wealthy. In which case, you forget about saving for retirement now.

In either scenario, it’s always a smart move to have an alternative plan in place. You know the saying – better safe than sorry!

Save 40 percent of your paychecks.

As a freelancer or contractor, the general rule of thumb is to save 30 percent of your paychecks. Doing so will help you set aside enough money to pay Uncle Sam.

But what if you upped the ante to 40 percent? With that extra 10 percent, you can create a savings fund for retirement and other financial goals.

Fund your own retirement plan.

Through an employer, traditional employees typically have two options when it comes to retirement accounts. They can choose between a 401(k) or 403(b). On occasion some people have access to pensions, but 401(k) and 403(b) are the most common.

If you’re unfamiliar, a 401(k) is an employer-sponsored retirement plan funded with pre-tax dollars. In a variety of cases, the employer offers a company-match program to supplement employee contributions. That means they contribute a percentage of money to the account based on factors like the employee’s annual contribution or total salary.

On the other hand, a 403(b) plan is commonly offered to specific public school employees, tax-exempt organizations and some ministers.

As your own boss, you no longer have access to those plans or the employer match. But you do have the luxury of picking your retirement plan from a wider range of options.

Discover what’s out there.

As you think about retirement, take the time to learn about the benefits of each plan.

SEP IRA: A Simplified Employee Pension (SEP-IRA) is a simple way for a one-person business to start saving. There isn’t a company size minimum requirement, and you can contribute the lesser of 25 percent of your total compensation or $54,000.

SIMPLE IRA: The Savings Incentive Match Plan for Employees (SIMPLE IRA) is a tax-deferred, employer-provided plan. It allows employees and employers to contribute to a traditional IRA set up for employees. This is a great option if you don’t want to provide full retirement benefits.

In 2017, you can contribute up to $12,500 to a SIMPLE IRA. Keep in mind, employers must match contributions up to a percent of the employee’s pay.

Solo 401(k) or One-Participant 401(k): If you have zero employees, consider a Solo 401(k). This plan follows the same rules and requirements as a traditional 401(k)  but only covers you and your spouse (if applicable). Your can make contributions as a business owner and an employee.

As an employee, the contribution limit is $18,000 – just like other 401(k) plans. As the employer, you can also contribute up to approximately 25 percent of your compensation depending on your legal structure.

IRA and Roth IRA: With traditional IRAs, contributions are generally tax deductible and not subject to income tax until withdrawn. On the contrary, the Roth IRA allows you to put money in post-tax, making withdrawals in retirement tax free.

Additionally, both plans have income phase out limits on contribution deductions and max out at contributions of $5,500.

Get the help you need.

It’s typically easier to set up a 401(k) because your employer handles a large majority of the back-end work.

But, when you’re the boss, it sometimes feels intimidating to tackle the process by yourself.

Fortunately, brokerages are more than happy to help support you. Firms like The Vanguard Group, Fidelity Investments and Charles Schwab Corporation offer options to help you set up the retirement plan that best fits your situation.

About Erin Lowry

Erin is a millennial personal finance expert and the founder of BrokeMillennial.com. She's also the author of Broke Millennial: Stop Scraping By and Get Your Financial Life Together. Lowry and her work have been featured on CBS Sunday morning, CNBC, Fox & Friends, USA Today, The Wall Street Journal, Cosmopolitan and NBC News. Connect with Erin on Twitter, Facebook and Google+.

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