Self-Employed Retirement Planning: Options for Building Your Retirement Savings

Self-Employed Retirement Planning: Options for Building Your Retirement Savings

While many people think of retirement as saying goodbye to their long-time bosses and colleagues in the office, self-employed people also leave their businesses when they retire.

Self-employed retirement planning looks a bit different from retirement planning for employees, as there are some additional options and considerations that employees don't need to address. If you're self-employed and don't have employer-provided benefits, it's important to understand the options you have in order to maximize your retirement savings.

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

While many business owners love the freedom and flexibility their lifestyle offers, self-employed retirement planning requires setting goals, planning a solid strategy and sticking to the plan.

Create a Financial Plan for Your Desired Lifestyle

Begin by making decisions about where you'd like to retire and how you want to spend your days. Will you retire completely? Some business owners continue to work part-time or consult in retirement, and deciding whether or not you will do so can help you prepare for retirement, estimate your retirement expenses and set a savings goal. A financial advisor can guide you through this exercise and help create a customized financial road map to get you to the retirement you envision.

Learn About Savings Plans for the Self-Employed

Self-employed income earners have access to a few other retirement savings tools and perks in addition to the savings accounts and programs available to everyone. For example, when you're self-employed, setting up retirement savings is a business expense, which means if you pay an eligible professional to help with your self-employed retirement planning, that cost could be a tax write-off. According to the IRS, costs incurred to establish an SEP, Simple IRA or qualified plan, such as a 401(k), could qualify.

Depending on your situation, contribution limits might mean you would need a combination of plans to maximize your retirement contributions. It's also important to consider the tax implications of contributing to each type of plan. Are contributions pretax or post-tax? Will contributions and investment income within the plan grow tax-free? What about withdrawals?

Self-employed people basic savings plan options, including:

  1. Traditional or Roth IRAs. Anyone with employment income can open traditional or Roth IRAs. Roth IRAs are funded with after-tax income, which means you won't pay tax on the withdrawals, while traditional IRAs are funded with pretax income, which means you won't pay tax on your contributions.
  2. SIMPLE IRAs. A Savings Incentive Match Plan for Employees (SIMPLE) IRA lets self-employed individuals contribute up to $13,500 in 2021, plus another $3,000 for those over the age of 50, and another 2% (fixed) or 3% (matching) contribution as part of self-employed retirement planning.
  3. SEPs. With a Simplified Employee Pension Plan (SEP) you can contribute up to 25% of your net earnings. For 2021, that is up to $58,000. An SEP could be a good option if you are a sole proprietor with no staff, but bear in mind that if you do have staff, you'll need to set up a plan for each employee. However, SEPs are easy to set up and can even be opened online.
  4. Solo 401(k)s. The Solo 401(k), also known as a one-participant 401(k) plan, is similar to the 401(k)s offered by most employers. These plans are simple to set up and easy to run, but they're only for single-person businesses — though your spouse can have a plan too. With a 401(k), the employer and employee both contribute, but in this case the business owner would wear both hats, contributing as an employee (elective deferral) and as an employer/business owner (an employee nonelective contribution).

Note that you may see the term "Keogh Plans" when you're researching retirement savings plans for business owners. According to a recent IRS update, the laws no longer differentiate between corporate and noncorporate plan sponsors, so the term is no longer necessary.

Other Savings Options

Some business owners build self-employed retirement savings in a defined contribution plan, such as a profit-sharing plan or a money-purchase plan.

Do you have a high-deductible health insurance plan? If so, you might consider adding a Health Savings Account (HSA) to your retirement plans. Pretax contributions to an HSA grow tax-free, and after age 65 they can be withdrawn tax-free for health-related expenses or at your current tax rate for any reason, so it can be a smart retirement savings option for some.

Other Financial Considerations for the Self-Employed Retiree

Along with choosing the types of accounts you'll use to build savings for retirement, there are other important decisions to make when you're planning to step away from your business.

Will you sell it to a third party or a family member? If a family member will take the reins, how will it impact your will and estate planning? Will your retirement income include dividends or other earnings from your business? Will you continue to earn a salary for part-time or consulting work?

In addition to these business-related decisions, it's also important to think about how you will protect yourself and your spouse against risk. This presents a great opportunity to review your life insurance policies. It's also wise to confirm and/or make changes to your coverage for health care benefits, which will likely become more important as you age. Now may be the time to consider private or public health insurance, such as Medicare.

Becoming familiar with your options for retirement planning as a self-employed person can help you ask better questions and make better decisions about how to build your savings. Talk to a financial advisor today about creating the best plan for your situation.

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