Global inter-connectivity has forged a new mobile workforce, and self-employment has become an increasingly viable source of income in this information age. As more opportunities for self-employment arise, many more Americans have taken the plunge, with individuals from the ages of 35 to 44, and 55 to 64, leading the pack, according to the Kauffman Index of Entrepreneurial Activity. Many of the benefits of self-employment are well-known: self-directed work without demands of a boss or manager; a schedule catered to individual needs, and the opportunity to work in exciting and interesting fields. However, there are also new difficulties that arise out of self-employment, particularly the preparation for retirement. The wise entrepreneur should enlist the aid of a wealth advisor who specializes in retirement planning to guide him or her through the realities of owning a small business.

Realities of Self Employment

While self-employment offers many benefits, entrepreneurs may not expect some realities of small business ownership. New business owners may regularly face the fact that they must save funds for retirement and plan without the benefit of a company-sponsored IRA or 401k. While an individual may not have access to a company retirement plan due to their preferred independence, there are certainly a variety of retirement plans for the self-employed to consider in order to achieve an equal or greater amount of financial security. Therefore, the self-employed individual, with the help of a trusted advisor, must carefully weigh the different retirement plans available in order to choose the one that best serves his or her particular needs.

The SEP-IRA Plan

The government provides several tax write-offs for retirement plans, and the simplest is the SEP-IRA. This IRA allows individuals to deposit up to 25% of net self-employment income (up to $49,000) into the account, allowing large pre-tax savings without much hassle or complicated financial wizardry. This plan provides the most flexibility of IRAs, because the entrepreneur can simply decide how much to put into the account while filing taxes, thus allowing changes based on the successes or difficulties of the previous year. However, the SEP-IRA simply works best for a sole proprietorship, because the money deposited into the account counts as the employer contribution, and thus the business must make an additional equal contribution for each employee. With a small business of less than five employees, this plan provides the flexibility and fiscal security ideal for a small-business owner.

A Solo 401K Plan

The solo 401k provides business owners with many of the same benefits as the SEP-IRA, but adds different contribution limits that provide a higher ceiling for total contributions. This plan is designed for a business owner and spouse, rather than a company with employees, because it prohibits additional employees from participating in the plan. A large advantage of this plan for solo entrepreneurs over the previous plan is the use of the Roth option, which allows the individual to deposit after-tax money into the account, which then grows free of taxes; certainly a potent investment into your future. However, with the limitations on additional coverage for other employees, this is a plan designed solely for individuals, rather than larger businesses.

Defined-Benefit and Target-Benefit Plans

Both of these plans are pre-arranged plans, in which the company chooses the course of investments, manages the portfolio, and determines the benefits for the employees. Defined-Benefit Plans are calculated through formulas about salary and other factors, while Target-Benefit Plans, on the other hand, utilize projected benefits. In this case, keep in mind that the provision of the final amount is dependent on the success of investments, and so is not a guaranteed figure.

The SIMPLE IRA

The SIMPLE IRA is the final major type of self-employment retirement benefits plan, an acronym for “savings incentive match plan for employees.” The government designed this plan to work specifically with small businesses below and up to 100 employees. Much like the first plan, this account provides a quick and easy way to invest in retirement for both the employer and employees and takes only minutes to set up with the proper paperwork. Similar to the standard 401k, self employed individuals can make contributions into a final account, with a generous employee contribution of up to $11,500 in pretax funds. The employer, in turn, must match the contribution up to 3% of the salary of the employee, or 2% of the total pay over the year. Therefore, while this plan does offer the simplicity of the first, a new company may find the employer matching contribution difficult in the early years of a business.

These plans all offer varied and stable ways to ensure that a self-employed business owner can prepare for the future. Most importantly, business owners should be careful to not neglect taking action in planning for their retirement and should discuss the advantages and disadvantages of each plan with a wealth advisor before choosing the plan most suitable to reaching their personal retirement goals.


About the Author

Paul’s 21 years of experience as a Financial Advisor gives him a unique perspective and expertise in leading wealth management practices. As an IRA Advisor (part of Ed Slott’s national IRA advisor network) and with access to world-class training and experience, Paul regularly collaborates with some of the best financial minds including forecaster Harry S. Dent and Asset Preservation Guru Jay Mitton. Paul is the founding partner of Logos Wealth Advisors, a boutique wealth services firm based in Southern California that specializes in a multi-disciplined approach that optimizes wealth preservation and wealth building.




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