So you're self-employed and loving the freedom and flexibility it provides. The one downside is that saving for retirement is now entirely up to you. No more employer match, no more set-it-and-forget-it paycheck deductions. Retirement contributions are your responsibility alone. The good news is with some discipline, self-employed people absolutely can save enough for a comfortable retirement. Here are three simple steps you can take to make sure your retirement savings are on track:
Start With the Basics: Open a Retirement Savings Account
As a self-employed individual, saving for retirement is entirely up to you. The first step is opening a retirement account that allows tax-advantaged saving and investing. The most common options are:
IRA (Individual Retirement Account)
An IRA allows you to contribute up to $6,000 per year ($7,000 if 50 or older) for 2019. Contributions may be tax deductible depending on your income and IRA type. Funds grow tax deferred and you pay income tax only when you withdraw money in retirement.
Roth IRA
Roth IRAs are a good choice if you expect higher taxes in retirement or want to withdraw contributions tax free at any time.
SEP IRA (Simplified Employee Pension Plan)
If you have employees, a SEP IRA allows you to contribute up to 25% of your compensation or $56,000 for 2019, whichever is less. You must offer the same percentage contribution to employees that have worked for you for at least 3 of the last 5 years.
Solo 401(k)
A solo 401(k) has high contribution limits - up to $56,000 for 2019 if under age 50, and $62,000 if 50 or older. As the name suggests, solo 401(k)s are for business owners with no full-time employees.
The key is to start saving as much as you comfortably can today. While self-employment has many benefits, saving for retirement is a responsibility that falls entirely on your shoulders. Take that first important step and open an retirement account that suits your needs and tax situation. Your future self will thank you!
Automate Your Savings With Direct Deposit
As a self-employed person, saving for retirement is entirely up to you. The good news is, automating your savings with direct deposit makes it practically effortless.
Set up automatic transfers
Set up an automatic transfer from your business account to your retirement fund each month. Start with whatever amount you can, like $50 or $100 per month, and increase it over time as your income grows. The key is to start now - your 65-year-old self will thank you.
With automatic transfers, your money is moved for you before you even have a chance to spend it. You'll quickly get used to not having that money in your regular account and your nest egg will start building up in no time.
Take advantage of tax benefits
Contribute to tax-advantaged accounts like an IRA, SEP IRA, or solo 401(k). Your contributions may be tax-deductible and the money can grow tax-deferred. A financial advisor can help determine which options are right based on your income and business structure.
IRAs allow you to contribute up to $6,000 per year ($7,000 if over 50) for 2020. SEP IRAs and solo 401(k)s have higher limits.
Your money can compound significantly over time thanks to tax-deferral. Contribute regularly to take full advantage of this opportunity.
Increase contributions annually
Once you have automatic transfers set up, increase your contributions by at least 1-2% each year to keep up with inflation and maximize your savings. You'll hardly notice the difference, but your retirement fund will grow steadily over the decades.
With some setup and a long-term plan, saving for retirement as a self-employed person can absolutely be achieved. Automate, take advantage of tax benefits, increase contributions over time, and stay invested for the long run. Your dedication now will provide financial security for life after your working days are done.
Look Into Tax-Advantaged Retirement Accounts
As a self-employed individual, saving for retirement is entirely up to you. The good news is there are tax-advantaged accounts designed specifically for small business owners and the self-employed. Here are three options to consider:
SEP IRA
A SEP IRA allows you to contribute up to 25% of your self-employment income, up to $58,000 for 2021. Contributions are tax-deductible and your money can grow tax-deferred until retirement. SEP IRAs are very easy to set up and have low fees. The only downside is the contribution limit, which may not be enough for high earners.
Solo 401(k)
Also known as a Self-Employed 401(k) or Individual 401(k), this plan allows you to contribute both as an employee and employer. For 2021, you can contribute up to $19,500 as an employee, plus up to 25% of your self-employment income (not to exceed $58,000) as an employer. Solo 401(k)s offer the highest contribution limits but tend to have higher fees and more complex administration.
SIMPLE IRA
A SIMPLE IRA is aptly named—it stands for Savings Incentive Match Plan for Employees. It allows you to contribute up to $13,500 for 2021. While SIMPLE IRAs have low fees and are easy to set up, the contribution limits are lower. However, SIMPLE IRAs do allow for employer matching contributions. If you employ other individuals, this can be an attractive benefit.
Choosing a retirement plan is an important decision. Be sure to consider the pros and cons of each option based on your personal financial situation. And don’t delay—the sooner you start contributing, the more time your money has to grow tax-advantaged for your retirement.
Invest in Yourself With Continued Education
Continuing to learn and develop your skills is essential as a self-employed person. Your knowledge and expertise are your business’s most valuable assets. Investing in yourself through ongoing education will ensure your offerings stay relevant, help you identify new opportunities, and boost your confidence.
Take a course
Take a course on a new skill, software program, or business topic that interests you. Online courses are affordable and convenient. You can find many free or low-cost options on websites like Udemy, Coursera, or Udacity. Learn at your own pace and apply your new skills directly to your business.
Read books
Read books related to your industry, business, marketing, productivity, or personal development. Reading is an easy way to expand your mind and gain new perspectives. Aim for reading one useful book each month. You can find many free ebooks or get print books from your local library.
Network
Networking is one of the best ways to continue learning. Connecting with others in your industry exposes you to new ideas and ways of thinking. Attend local industry events, join relevant groups on LinkedIn, or start your own mastermind group. Share knowledge and experiences, ask questions, and develop mutually beneficial relationships.
Mentor others
Mentoring another person is a great way to reinforce your own learning. Explaining ideas and processes to someone else helps strengthen your understanding and identify any gaps. Offer to mentor new freelancers or small business owners in your area of expertise. Helping others succeed is rewarding and will make you a better business owner or freelancer in the process.
Continuous self-education and improvement will give your business a competitive advantage. Ongoing learning ensures you continue to develop the knowledge and skills that will move your business forward for years to come. Make learning a lifelong habit and investment in your success.
Automate contributions
Set up automatic transfers to move money from your checking to your emergency fund each month. Start with whatever you can, even if it’s just $25 or $50 a month. Increase the amount over time as your income allows. The key is to pay yourself first before other discretionary spending. Automating the process will help make saving a habit.
Keep the money accessible
Don't tie the money up in investments since the purpose is to have it readily available when unexpected costs arise. Look for a high-yield savings account to earn some interest on the balance.
Use only for real emergencies
Only withdraw money from your emergency fund for real financial emergencies like medical bills, home or car repairs, or loss of income. Don't tap into it for vacations, hobbies or other discretionary items. Replenish the fund as soon as possible to ensure you have a financial safety net the next time an emergency strikes.
Building an emergency fund may delay retirement account contributions for a while, but the financial security it provides is well worth it. Once you have a solid emergency fund established, you can focus on saving and investing for your retirement confident in the knowledge you have a financial cushion to fall back on if needed.
Conclusion
You’re self-employed, so you call the shots and set your own schedule. You also shoulder more responsibility, including saving for your own retirement. But you can do it, and it doesn’t have to be complicated. Set up an automatic transfer to move money from your business account to a retirement account each month. Increase it by 1% each year and you’ll be in great shape without even noticing. Look into low-cost investing options like index funds to get the most from the money you do put in.
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