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I’m Self-Employed. How Do I Save for Retirement

Being your own boss comes has different perks as well. But it forces you to handle work taken care of by a human resource or finance department. For instance, you have to find your own health care plan and deduct taxes from your paycheck. And, when it comes to saving for retirement, it is your responsibility to begin a savings fund. The great choices for most self-employed workers are a Simplified Employee Pension (SEP) and a solo 401(k). You can make tax-deductible contributions to either plan, and the money grows tax-deferred unless you withdraw it in retirement (you have to pay a 10 percent penalty for withdrawals before age 59½).

Self-employed 401(k)

A self-employed 401(k), also called a solo 401(k), can be an option to maximize retirement savings even if you are not making lots of money. If you’re self-employed or own a business or partnership with no employees you can open a self-employed 401(k). A wife can participate as well. You obtain two opportunities for contributing to a self-employed 401(k) first as the employee, and again as the employer. As an employee, you can make a Roth contribution of up to 100 percent of your compensation, with a maximum of $19,500 in 2021 and 2020. Once you are over age 50, you can make catch-up contributions for 2021, and in 2020 you can save more than $6,500, for a total of $26,000 for both years. As the employer, you can contribute up to 25 percent of your eligible earnings. The employer contribution is made before tax. (Again, consult a tax expert or the IRS website for details on computing eligible earnings.) These accounts give small business owners the opportunity to save an important amount of money every year.

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The total that can be contributed for workers and employers is $58,000 in 2021 ($57,000 in 2020), plus more than $6,500 (in both years) for people age 50 and over. If you’re self-employed or have income from freelancing, you can open a Simplified Employee Pension plan more commonly called a SEP IRA. The SEP-IRA is available to sole proprietors, S-corporations, partnerships, C-corporations. Contributions to a SEP IRA are tax-deductible. The amount being put in varies that is based on your income. The most an employer can contribute to an employee’s SEP IRA is either 25 percent of eligible compensation or $58,000 for 2021 ($57,000 for 2020), whichever is very low. (Note that the rules on determining eligible compensation, which is different for self-employed and worker SEP participants, can be complicated.

If you have employees, you have to set up accounts for those who are eligible, and you’ve to contribute a similar percentage to their accounts that you contribute for yourself. Workers can’t contribute to the account; the employer makes all the contributions. This account works well for freelancers and sole entrepreneurs, for businesses with employees (as long as the owners do not mind making the same percentage contribution for the employees that they make for themselves). The SEP-IRA is easy and inexpensive to set up and maintain. Plus, there are no tax forms to file. Save 40% of your paychecks. As a freelancer or contractor, the general rule of thumb is to save 30% of your paychecks. Doing so will aid you set aside sufficient money. But what will happen if you raised the ante to 40%? With that more than 10%, you can make a savings fund for retirement and other financial aims.

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Fund your own retirement plan

Through an employer, traditional employees have 2 options when it comes to retirement accounts. They can select between a 401(k) or 403(b). On occasion, a few people have access to pensions, but 401(k) and 403(b) are the most common. If you are unfamiliar, a 401(k) is an employer-sponsored retirement plan funded with pre-tax dollars. In a variety of cases, the employer provides a company-match program to supplement employee contributions. That means they contribute a percentage of money to the account based on factors such as the employee’s annual contribution or total salary. On the other hand, a 403(b) plan is usually offered to certain public-school employees, tax-exempt organizations, and some ministers. As your own boss, you cannot access those plans. But you can pick the retirement plan from various options.

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