According to Forbes, over 30% of Americans are self-employed. This situation means they are responsible for their own retirement planning. If you are self-employed, knowing which retirement plan is best for you can be difficult.
While many different retirement plans are available, not all of them will be right for every self-employed individual. Here are several of the most popular retirement plans for the self-employed:
These retirement savings plans allow you to set aside money from your paycheck before taxes are taken. The money in your 401(k) plan can then be invested and will grow tax-deferred.
What makes a 401(k) plan a good option for the self-employed is that you can choose to make catch-up contributions if you are over the age of 50. This setup can be helpful if you have not been able to save as much for retirement as you would like.
As the name indicates, a SEP IRA is an individual retirement account (IRA) specifically designed for self-employed individuals and small business owners. A SEP IRA can accommodate up to 25% of your annual net income.
Like a traditional IRA, the money in your SEP IRA can grow tax-deferred. However, one of the benefits of a SEP IRA is that you can make catch-up contributions regardless of age.
This retirement plan is akin to a traditional 401(k) plan, but it’s specifically designed for self-employed individuals who don’t have any employees. With a Solo 401(k) plan, you can contribute up to $19,500 yearly (or $26,000 if you are over 50).
One of the perks of a solo 401(k) plan is that you can make employer and employee contributions. This setup can help you save more for retirement than you would be able to with other retirement plans.
Profit Sharing Plan
A profit-sharing plan can be a good option for self-employed individuals who also have employees. With this plan, you can contribute up to 25% of your net income each year. The money in your profit-sharing plan can then be invested and will grow tax-deferred.
One of the benefits of a profit-sharing plan is that you can choose how much you want to contribute each year. This flexibility can be helpful if your income varies from year to year. You can also use a profit-sharing plan with a 401(k) plan to help you save even more for retirement.
With this type of retirement savings account, you can set aside money from your paycheck before taxes are taken out. The money in your traditional IRA can then be invested and will grow tax-deferred.
Unlike some other retirement plans, there is no age limit for making contributions to a traditional IRA. This feature makes such plans a good option for self-employed individuals who want to save for retirement but haven’t been doing so in the past.
Additionally, your traditional IRA can be used to buy a first home or pay for educational expenses.
Factors to Assess When Choosing a Retirement Plan
There are a few factors that you should consider when choosing a retirement plan. These include:
One factor to consider is your age. If you are younger, you may want to choose a retirement plan that allows you to make catch-up contributions. This approach can help you save more for retirement.
Your income is another factor to consider when choosing a retirement plan. If you have a higher salary, you may want to choose a retirement plan that allows you to contribute more money each year.
It would be best to envisage how much money you have saved for retirement. If you have not saved much, you may want to choose a retirement plan that allows you to make catch-up contributions.
Your Risk Appetite
This designation refers to the level of risk you are willing to take when investing your money. If you’re not comfortable taking risks, you may want to choose a retirement plan with more conservative investment options.
Finally, it would help if you factored in the tax implications of each retirement plan. Some plans, like traditional IRAs, allow you to defer taxes on your contributions. This setup can be beneficial if you think your retirement tax rate will be lower.
The best retirement plan for self-employed individuals depends on several factors. By considering all of these determinants, you can choose the best retirement plan for your needs.
Do Away with the Guesswork
Making the right decisions about your retirement plan can be difficult. There are a lot of factors to consider, and it can be hard to know what’s best for you. Fortunately, there is help available. Consult a financial expert to get started on the right path.