I'm Self-Employed - What Are My Retirement Options?

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Entrepreneurship is a rising trend in today's economy. If you're self-employed, how can you plan for a robust retirement?

In today’s economy, entrepreneurship is a rising trend as people across America look for jobs and new opportunities.  According to Forbes.com, a recent report by Babson and Baruch Colleges points out an exciting finding: The percentage of adults involved in startups in 2012 hit 13%–a record high since Babson began tracking entrepreneurship rates in 1999.  43% of Americans believe there are good opportunities for entrepreneurship, up by more than 20% since 2011, according to the Global Entrepreneurship Monitor US Report.

The old rule of getting a traditional job doesn’t apply anymore.  56% of adults said they had the ability to start a business—a confidence level higher than in many innovation-driven economies.

That said, of small business owners surveyed by American Express, 60% say they’re not on track to save the money they'll need during retirement.  73% said they are worried about their ability to save for the lifestyle they want in retirement.

If you describe yourself as a small business owner (or if you're self-employed, an entrepreneur, or a freelancer), you may want to pay attention.  After you create a stable foundation for yourself by creating an emergency savings fund that can cover you for at least a few months if something happens to your job, you should make sure you are considering your retirement options.

Generally speaking, there are three (plus one) main account options for retirement when you’re a freelancer:

  • Roth or Traditional IRAs:  An Individual Retirement Account (IRA) is one of your most flexible options.  With a traditional IRA, your contributions are generally tax-deductible (great example from Learn Vest: if you make $50,000 in income and contribute $5,000 to your IRA, you’ll only be taxed on $45,000 of your income this year).  With a Roth IRA, you don’t get a tax break in your current year, but your money grows tax-referred, and assuming you leave it alone for at least 5 years and until you reach age 59 ½, it can be withdrawn tax-free.  This can be an advantage because you won’t be taxed on the earnings you make as your contribution grows.

Some things to keep in mind:

  • Income limits: As of 2013, the amount you can contribute to a Roth starts phasing out when you hit $112,000 in income as a single person.  For married couples, there are also income limits which restrict deducting traditional IRA contributions when either spouse is covered by a qualified retirement plan.  There are also contribution limits for IRAs in general.  In 2013, the max you can contribute to any kind of IRA is $5,500 or $6,500 if you’re 50 or older.
  • If you want to save more than these limits, read on to 2 and 3!
  • SEP IRA:  An SEP IRA lets self-employed people save a lot more than they could with a traditional or Roth IRA due to the limits set on these kinds of retirement options.  In 2013, you can save up to 25% of your income or $51,000 (whichever is less).  If you are married and you and your spouse are both self-employed, you can save up to $51,000 separately.
  • Solo 401(k):  With a solo 401(k), you can contribute up to the annual $17,500 limit, just like a regular 401(k).  You may consider this option if you want to make larger contributions than with a regular IRA, and want more flexibility than an SEP IRA.
  • A guaranteed option:  As a small business owner, you are very familiar with ups and downs, and bearing the unexpected.  Knowing that you have no idea what the market is going to be like when you retire, consider a guaranteed retirement option, like an annuity.  An option like this can help cover your basics, and won’t decrease if the market tanks.

Written by Kayla Johnson

This blog post is from the Author's perspective and doesn't speak for brightpeak financial. Contact brightpeak if you want to know more about brightpeak products, and keep in mind that they are not available in all states and there are some limitations (some exclusions and restrictions may apply).

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