Self-employed? Running a business can run you ragged. But what if you translate your enterprising can-do into thoughtful plans for your financial future? Easy to do? Not always. But the peace of mind of knowing that you have a plan in place it can be worth it. There’s even the possibility of receiving a potential tax break. In other words, consider it an investment in yourself, as well as your business.
Data shows that envisioning and planning for retirement are often knocked down the list of priorities by the self-employed. Some self-employed individuals are increasingly strained by out-of-pocket health care costs for themselves—especially if they help their small staffs by shouldering some of the insurance costs. That’s according to the findings of a 2015 survey by TD Ameritrade Holding Corporation.
From health care costs and the minimum-wage debate to their own looming retirement strains, a 2015 survey of self-employed Americans reveals a lot. For starters, this subset of the American workforce may have a lot riding on the 2016 presidential election, although those polled think their priorities—health care costs, regulation, and more—may not be the highest on a new administration’s task list. Regardless, the financial anxieties are there.
Here’s a sampling of retirement-focused findings. While 55% of those surveyed say they are saving for retirement (when they can), the average self-employed American saves $415 per month for non-retirement items such as the following:
Over half (55%) of those surveyed say they are behind in saving for retirement, and 48% say the inability to predict income is a problem; 41% say they do not make regular contributions to savings. The majority (69%) do not have a specific savings goal in mind, nor do they have a backup plan for what to do if they don’t have enough when they retire. Seventy-six percent simply say they’ll continue working if they can’t save enough, and 51% count on Social Security or government pensions.
**This online survey was conducted by Head Solutions Group with 1,505 U.S.-based, self-employed adults aged 18 or older, between September 29 to October 9, 2015, on behalf of TD Ameritrade Holding Corporation.
The good news is that the retirement-planning industry is becoming increasingly savvy about helping the self-employed make retirement a reality. And the industry is anchored by retirement plans designed for the self-employed, many of which are modeled similarly to plans used in the traditional workplace.
A SEP (Simplified Employee Pension) plan IRA may be attractive for its fairly high annual contribution limits and minimal paperwork, whether or not you have employees. It also gives you the flexibility to vary contributions—or skip them entirely—according to your yearly business needs. A SEP IRA can be ideal for a sole proprietor. Annual contributions can be as high as 25% of net self-employment income for an owner—up to $53,000 in 2015 and 2016. However, there are a few caveats if you have employees: All contributions are made only by the employer. And, as an employer, you’re required to contribute the same percentage of an employee’s compensation as you contribute for yourself. So costs may come into play.
This choice offers higher contribution limits, so an individual 401(k) or an individual Roth 401(k) can be a great choice for contributing a lot. But it’s only available if you work for yourself or your only employee is your spouse. It requires more paperwork than a SEP, but allows 25% of net self-employment income for the business owner, plus an additional $18,000 in salary deferrals for 2015 and 2016, to a maximum of $53,000. If you’re 50 or older, you can contribute an additional $5,500, bringing the maximum to $58,500. Your employed spouse can also contribute up to $18,000 in salary deferrals (plus a catch-up contribution of $5,500 if he or she is age 50-plus). And you, as the employer, can match that contribution up to 25% of salary. This plan also allows you to borrow against your savings.
A SIMPLE (Savings Incentive Match Plan for Employees) IRA is available to companies with 100 or fewer employees. With this plan, employees make their own retirement contributions—up to $12,500 for 2015 and 2016, with a catchup contribution of $3,000 for those 50 or older. As the employer, you’re required to make a matching contribution (dollar-for-dollar up to 3% of employee compensation). Although your financial obligation as an employer can be less, the contributions you can make for yourself may be significantly lower than for a SEP IRA or individual 401(k). Yep, you’re subject to the same rules as your employees.
This can be a smart individual choice that offers potential tax benefits. You can contribute to both a small-business retirement plan and a traditional IRA and potentially get a tax deduction for each, depending on your income. The maximum for 2015 and 2016 is $5,500, with a $1,000 catch-up contribution if you’re 50 or older.
Offering rewards on a sliding scale, this choice may fit businesses with varying profits and, importantly, varying contributions from staff members toward those profits.
Get more information on how to set your retirement plan in motion.
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