Retirement Planning For The Self-Employed

Shawn Plummer, CRPC

Chartered Retirement Planning Counselor

The Best Retirement Plans For Self-Employed Workers

As a self-employed worker, choosing the right retirement plan is essential to ensure financial security in your retirement years. Here are some of the best retirement plans for self-employed workers:

  • Simplified Employee Pension (SEP) Plan: A SEP retirement plan is easy to set up and maintain and allows you to contribute up to 25% of your net self-employment income (up to $69,000 for 2024) to a retirement account. This plan is ideal for self-employed workers with few or no employees.
  • Solo 401k Plan: A Solo 401k plan allows you to make both employee and employer contributions, with a maximum contribution of $69,000 for 2024. Like the SEP Plan it can not exceed 25% if your net income. This plan is ideal for self-employed workers with no employees or a spouse who is also contributing.
  • Traditional IRA: An Individual Retirement Account (IRA) allows you to contribute up to $6,500 for 2023 (or $7,500 if you’re over 50). This plan is ideal for self-employed workers who want flexibility in their investment choices and the ability to deduct contributions from their taxes.
  • Roth IRA: A Roth IRA allows you to contribute after-tax dollars, with tax-free withdrawals in retirement. You can contribute up to $6,500 for 2023 (or $7,500 if you’re over 50). In 2024 this will increase to $7,000 and $8,000, respectively. This plan is ideal for self-employed workers who expect to be in a higher tax bracket in retirement.
  • Simple IRA: A Savings Incentive Match Plan for Employees (SIMPLE) IRA allows you to contribute up to $15,500 for 2023 (or $19,000 if you’re over 50) with employer-matching contributions. In 2024 these will increase to $16,000 and $19,500. This plan is ideal for self-employed workers with fewer than 100 employees.
What Is The Best Retirement Plan For Self Employed

Why Planning For Retirement Is Important When You Are Self-Employed

Here are a few reasons why retirement planning is so important when you’re self-employed:

You don’t have a guaranteed income in retirement

When you’re self-employed, you don’t have a guaranteed income in retirement like you would if you were receiving a pension or Social Security. However, you’re responsible for generating your income in retirement, so you need to plan and save accordingly.

You may need to retire earlier or later than expected

As a self-employed individual, you may have a less predictable income than someone who works for an employer. This means you may need to retire earlier or later than expected to make your savings last. Retirement planning can help you be prepared for these unexpected scenarios.

You need to save more for retirement.

Because you don’t have an employer-sponsored retirement plan, you need to save more on your own. This can be challenging, especially if you’re starting your self-employment journey. However, by starting early and being disciplined with your savings, you can set yourself up for a comfortable retirement.

You have more flexibility in your retirement planning

One advantage of being self-employed is having more flexibility in your retirement planning. You can choose the best retirement plan for you, such as a SEP IRA, solo 401k, or traditional IRA. You also have more control over your retirement investments, which can help you achieve your retirement goals.

The Best Retirement Plans For Self-Employed Workers

How to Choose the Best Self-Employed Retirement Plan for You

Choosing the best retirement plan for self-employed individuals can be daunting, but planning and securing your financial future is essential. Here are some tips to help you choose the best self-employed retirement plan for you:

  • Determine your retirement needs and goals: Start by considering your retirement needs and goals. How much money do you need to retire comfortably? What lifestyle do you envision for yourself in retirement? Consider your age, expected retirement date, and current income and expenses.
  • Evaluate your options: There are several retirement plans available for self-employed individuals, including Simplified Employee Pension (SEP) plans, Solo 401k plans, and Individual Retirement Accounts (IRAs). Each plan has different contribution limits, tax implications, and other features. Evaluate each option carefully to determine which one is best for you.
  • Consider your income and expenses: Your income and expenses will significantly determine how much you can contribute to your retirement plan each year. So make sure you choose a plan that allows you to save as much as possible without putting too much strain on your budget.
  • Think about your long-term financial goals: Retirement planning is just one aspect of your overall financial plan. Consider how your retirement plan fits into your long-term financial goals and whether it complements other financial planning strategies you have in place.
  • Please seek professional advice: Retirement planning can be complex, and ensuring you make the best decisions for your financial future is essential. Consider working with a financial advisor or accountant specializing in retirement planning for self-employed individuals.

Why Saving Is Hard for the Self-Employed

Here are some reasons why planning for retirement is crucial when you are self-employed:

  • No Pension Plan: Unlike employees who work for a company, self-employed individuals cannot access a pension plan. This means you are solely responsible for creating your retirement income, which can be daunting.
  • Longer Working Life: As a self-employed individual, you may have the flexibility to work well into retirement. However, this does not mean that you should rely on it. Planning for retirement will ensure you have a nest egg when you stop working.
  • Volatility Of Income: Self-employed individuals often have volatile incomes, making it challenging to plan for retirement. By planning for retirement, you can create a budget that considers the fluctuations in your income.
  • Tax Benefits: Setting up a retirement plan as a self-employed individual can provide you with significant tax benefits. Contributions to a retirement plan are tax-deductible, which can help lower your taxable income and reduce your tax bill.
  • Peace of Mind: Knowing that you have a plan in place for your retirement can provide you with peace of mind. You can focus on growing your business and not worry about your retirement years.

In conclusion, planning for retirement is essential when you are self-employed. It can give you a sense of security and peace of mind while helping you reduce your tax bill and create a budget considering your income’s volatility.

Keogh Plan

A Keogh Plan, also known as a Self-Employed Pension Plan, is a type of retirement savings plan designed specifically for self-employed individuals and small business owners. Here’s how it works:

  • Determine your eligibility: To qualify for a Keogh Plan, you must be self-employed, either as a sole proprietor or as a small business owner. For example, you can’t participate in a Keogh Plan if you’re an employee of a company that offers a retirement plan.
  • Choose the type of Keogh Plan: There are two types of Keogh Plans: a defined benefit plan and a defined contribution plan. A defined benefit plan provides a fixed retirement income based on a formula that considers your age, income, and years of service. A defined contribution plan allows you to contribute to the plan, which is invested and can grow over time.
  • Set up the plan: Once you’ve chosen the type of Keogh Plan that’s right for you, you’ll need to set up the plan and establish the trust that will hold the plan assets. You’ll also need to choose a plan administrator and a trustee to manage the plan and make investment decisions.
  • Make contributions: With a defined benefit plan, the contributions are determined by the formula used to calculate your retirement income. You can contribute up to a specific limit with a defined contribution plan. For 2024, the contribution limit is $69,000 or 100% of your self-employment income, whichever is less. If you’re over 50, you can make catch-up contributions of up to $7,500.
  • Invest the contributions: The contributions to your Keogh Plan are invested in the assets you choose. You can invest in various options, including stocks, bonds, mutual funds, and other securities.
  • Receive distributions: When you reach retirement age, you can take distributions from your Keogh Plan. You’ll receive a fixed income with a defined benefit plan for the rest of your life. With a defined contribution plan, you can choose how to receive your distributions, either as a lump sum or as periodic payments.

A Keogh Plan is a retirement savings plan for self-employed individuals and small business owners. It offers tax advantages and allows you to save for retirement while investing your contributions in the assets of your choice.

Best Retirement Account For Self Employed

How a Health Savings Account Works

Here’s how an HSA works for self-employed individuals:

  • First, choose a high-deductible health plan: As a self-employed individual, you can choose one that meets your healthcare needs. The deductible for an HDHP is typically higher than a traditional health plan, but the premiums are lower. This can save you money on your monthly healthcare expenses.
  • Contribute to your HSA: Once you have a high-deductible health plan, you can start contributing to your HSA. The contributions are tax-deductible, meaning you can reduce your taxable income by the amount you contribute. For 2024, the maximum contribution limit is $4,150 for individuals and $8,300 for families. If you’re over 55, you can contribute an additional $1,000.
  • Use the funds for qualified medical expenses: You can use the funds in your HSA to pay for qualified medical expenses, including deductibles, co-payments, prescriptions, and other healthcare expenses. You can also use the funds to pay for certain health insurance premiums, including COBRA and long-term care insurance premiums.
  • Invest the funds: If you have a large balance in your HSA, you can invest the funds in mutual funds, stocks, and other investments. This can help you grow your savings and make your HSA a powerful tool for long-term healthcare planning.
  • Pay taxes on non-qualified expenses: If you use the funds in your HSA for non-qualified expenses, you’ll have to pay taxes on the withdrawal. You’ll also be subject to a 20% penalty if you’re under 65.

An HSA is a valuable tool for self-employed individuals who want to save on healthcare expenses while reducing their taxable income.

Next Steps

In conclusion, becoming a self-employed worker can be financially and professionally rewarding. However, it does require careful planning for retirement, both in terms of the type of plan you choose and the amount of money you save yearly. This guide has provided some helpful tips to simplify and make this process more manageable. Consider what steps you can take to optimize your retirement savings now so that you can enjoy a secure financial future later. Request a free quote today and take the first step toward a successful tomorrow!

Retirement Planning For The Self-Employed

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Frequently Asked Questions

How does a self-employed person save for retirement?

A self-employed person can save for retirement through options such as a Keogh Plan, SEP IRA, SIMPLE IRA, or personal savings.

Can an LLC have a retirement plan?

Yes, an LLC can have a retirement plan.

How do I save for retirement if I am self-employed?

Save for retirement through a Keogh Plan, SEP IRA, SIMPLE IRA, or personal savings.

Can I contribute to an IRA if I am self-employed?

Yes, a self-employed person can contribute to an IRA.

Can you have a retirement plan if you’re self-employed?

Yes, self-employed individuals can have a retirement plan such as a Keogh Plan, SEP IRA, SIMPLE IRA, or personal savings.

Is there a 401k option for the self-employed?

Self-employed individuals can set up an individual 401k plan.

Traditional or Roth Ira, what is best for self-employed retirement?

The choice between a traditional or Roth IRA for self-employed retirement savings depends on various factors such as income level, tax bracket, and personal financial goals.

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Shawn Plummer, CRPC

Chartered Retirement Planning Counselor

Shawn Plummer is a Chartered Retirement Planning Counselor, insurance agent, and annuity broker with over 14 years of first-hand experience with annuities and insurance. Since beginning his journey in 2009, he has been pivotal in selling and educating about annuities and insurance products. Still, he has also played an instrumental role in training financial advisors for a prestigious Fortune Global 500 insurance company, Allianz. His insights and expertise have made him a sought-after voice in the industry, leading to features in renowned publications such as Time Magazine, Bloomberg, Entrepreneur, Yahoo! Finance, MSN, SmartAsset, The Simple Dollar, U.S. News and World Report, Women’s Health Magazine, and many more. Shawn’s driving ambition? To simplify retirement planning, he ensures his clients understand their choices and secure the best insurance coverage at unbeatable rates.

The Annuity Expert is an independent online insurance agency servicing consumers across the United States. The goal is to help you take the guesswork out of retirement planning and find the best insurance coverage at the cheapest rates

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