Having a strategy for retirement is particularly important when you’re self-employed, as there are certain pitfalls you must watch out for along the way.
Being self-employed comes with its own perks, including greater control over your career, the potential for more flexibility in your schedule and, above all, no annoying boss to answer to. One downside of working for yourself, however, is not being able to take advantage of an employer’s 401(k) or similar retirement plan. Instead, the responsibility of building wealth for the future rests squarely on your shoulders. Taking care to avoid the following stumbling blocks can help your retirement years to be as bright as possible. (For more, see Retirement Planning Basics.) Here are three common retirement-planning mistakes that self-employed savers should avoid making.
1. Choosing the Wrong Retirement Plan
- Solo 401(k) – A solo or independent 401(k) is designed for someone who operates a sole proprietorship or who runs a small business with his or her spouse as the only employee. As of 2016 the IRS allows self-employed business owners to contribute up to $18,000 in elective deferrals along with employer nonelective contributions. A catch-up contribution of $6,000 is also allowed if you’re 50 or older.
- SEP IRA – A Simplified Employee Pension or SEP IRA is a traditional IRA designed for self-employed workers. For 2016 the contribution limit for a SEP IRA is set at 25% of earnings or $53,000, whichever is less. You can set up a SEP IRA if you’re a sole proprietor or you run a business with more than one employee. Catch-up contributions aren’t allowed.
- SIMPLE IRA – Like a SEP, a SIMPLE IRA or Savings Incentive Match Plan for Employees can be a valuable retirement savings tool for someone who runs a business solo or has employees. The biggest difference between the two is the annual contribution limit. As of 2016 the maximum amount you can chip in is $12,500. The catch-up contribution limit is set at $3,000.
All three options offer a tax-deferred way to invest, and contributions are tax-deductible, but they’re not identical. Choosing the wrong plan can limit how much you can save. (For more, see: Retirement Plans for the Self-Employed.) Check with a financial advisor to make sure you’ve picked the right type.
2. Calculating Contributions Incorrectly
While each plan has a maximum contribution limit, there are some guidelines to keep in mind when calculating how much you put into your plan. Specifically, you need to make sure you’re using your net business income, less the deduction for half of what you pay in self-employment tax.
Read more: Self Employed? Avoid These 3 Retirement Mistakes | Investopedia http://www.investopedia.com/articles/personal-finance/030816/self-employed-avoid-these-3-retirement-mistakes.asp#ixzz43ANWOfgp
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Built on expert advice, our guide provides an in-depth overview of the options available to self-employed individuals who may be experiencing financial difficulties during this unprecedented time. We cover areas such as:
- Tax breaks & extensions
- Unemployment benefits
- CARES Act resources