I came across this article recently and it highlighted a retirement savings issue many people face, especially those that are self-employed.
“Many U.S. households are not adequately prepared for retirement, according to a new report from the Federal Reserve that found 31 percent of non-retired respondents indicating they have no retirement savings or pension, including 19 percent of those ages 55 to 64.”
Further, the most commonly reported form of retirement savings is a defined contribution plan, such as a 401(k) or 403(b) plan, which 44 percent of people possess. However, these plans typically are provided by an employer, which is obviously not available if you are self-employed. Here is a quick refresher on some of the more common types of retirements plans for self-employed individuals:
- Solo 401(k)
o Maximum amount you can put in: 20 percent of net self-employment income plus $17,500, up to $52,000 in 2014; if you’re 50 or older, you can put in up to $5,500 more. This is best for those with no employees and large amounts of self-employed income as the contribution maximums are so high. There is also a Roth option for solo 401(k) plans; If you opt for the Roth version, you put in after-tax dollars and your money grows tax-free - which means it is not taxed upon withdrawal, but you don’t get the upfront tax deduction.
- SEP IRA (Simplified Employee Pension)
o Maximum amount you can put in: 25 % of self-employment compensation, up to $52,000 for 2014. Again, based on the high levels of allowable contributions this is for those with high levels of self employment income. These tend to be more flexible and simplified plans, but if you have employees you will have to also contribute money for them, however, contributions are discretionary.
- SIMPLE IRA (Savings Incentive Match Plan for Employees of Small Employers)
o Maximum amount you can put in: $12,000; up to $14,500 if you’re 50 or older. This is best for self-employed people with under 100 employees, although you can also have a SIMPLE IRA if you don’t have employees. If you do have employees, you generally must match up to 3% of their compensation.
These are some of the more common plans available and used, but there are other options available as well. I’d suggest discussing with your CPA and/or investment advisor to decide on the best plan for your situation.