Retirement for Self-Employed Workers: How to Get Started

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PUBLISHED BY admin / June 22, 2021

Retirement is worth thinking about even at the earliest stages of one’s career. In fact, the earlier one commits to financial planning for retirement, the better. If you’re weighing the importance of saving money for retirement, check out our beginners guide on the matter. Now let’s take it a step further. What if you’re committed to getting started with your retirement plan as a self-employed worker? As it turns out, self-employed workers have a much trickier financial portfolio than their company-employed contemporaries. Therefore, any looking to secure a self-employed retirement will require a few different tricks of the trade. That’s what this article is all about: financial literacy and the best retirement options for self-employed workers.

Self-Employed vs Company-Employed Workers

There are a few stark differences that create a huge disparity between self-employed and company-employed workers. The first being the more obvious fact of, as a self-employed worker, you’re completely on your own. If you need any help concerning your business whatsoever, you’re the one calling all the shots. No payroll deductions, no stock investing, no financial tracking. You handle everything. That includes looking through the best self-employed retirement plans and sticking to one.

Self-employed workers also have a higher level of financial volatility, which makes finances unsteady and harder to track. We’ve got some great tips on preparing for financial volatility. Moreover, all costs of running a business require more detail than normal employees. That includes health care (since you are your business), education, and risk assessment. For the reasons found in these surplus challenges, there exists favored retirement plans for self-employed workers. These plans make retirement for self-employed folks like you and me a whole lot easier.

What is the Best Retirement Plan for Self-Employed Workers?

A retirement plan will differ depending on the business. The most important factors are household income, desired retirement income, and tax policy. Generally, smaller businesses will have fewer numbers and accounts to dally around with. A 2019 study found that more than 70% of self-employed workers are sole proprietors or freelancers. That means mid-sized to small business owners – even just one person – are more common than not. Most readers of this article will fall within that bracket, and that’s where we’ll be focusing:

SEP IRA

A SEP IRA, or Simplified Employee Pension Investment Retirement Account is a great option for sole proprietors. It also covers small business owners with just a few employees. The SEP is a special IRA that allows employers (you!) to contribute up to 25% of net income toward retirement (not exceeding $58,000 in 2021). It does not include contributions made toward oneself. Also, since it does not allow catch-up contributions, it’s best to start early at a steady pace.

What’s cool is that there are no annual funding requirements, and if you do choose to fund the account, there’s flexibility in going about it. Moreover, it’s straightforward and simple. SEP IRAs require a minimal amount of paperwork and administrative action, making it a favorite amongst the self-employed.

Note: Net earnings for the self-employed is defined as annual profit less half of self-employment taxes.

Individual 401(k)

Individual or Solo 401(k)s are similar to SEP IRAs with a few differences. Firstly, they’re available to single parties only (except with a spouse in some cases). Secondly, Since a Solo 401(k) treats you as both an employee and an employer, a contribution can be made twice:

  • As an employee: You may contribute up to $58,000 (2021) or 100% of earned income, whichever is less. Plus, if you’re over the age of 50, you can contribute up to $6,000 each year in catch-up contributions.
  • As an employer: You may contribute up to 25% of your net earnings, on top of your “employee” contribution.

For this reason, solo 401(k)s are a good option for the older self-employed worker. Saving for retirement gets easier with catch-up contributions in case you’ve gotten a late start. It also allows business owners to vary their yearly savings due to the large contribution margin.

Health Saving Account

Officially set up for savings toward medical expenses, a Health Saving Account (HSA) is a strong option to consider as a retirement plan. Just like a 401(k), an HSA collects pre-tax dollars, and the money within the account grows tax-deferred. Until the age of 65, this money can be withdrawn to cover medical expenses. After 65, it can be used to cover current or past medical expenses, all while remaining tax-free. And here’s the catch – it can also be used for non-medical expenses at the current tax rate. It’s a double whammy, especially helpful for freelancers with high medical deductibles. The one catch is that you must be covered by a qualifying high-deductible medical plan. That’s $1,400 per individual as of 2021. Still and yet, it’s a helpful choice for freelancers and the like.

All of these retirement plans for self-employed workers can be established by way of a bank, mutual fund, or financial institution. Look into providers to see who offers what.

Saving Money as a Self-Employed Worker

Before asking yourself “Am I saving enough for retirement?”, consider your age and lifestyle habits. Generally, you’ll want at least 60% of your current salary to suffice as your retirement salary. That being said, there are several ways to go about calculating your savings. We’d recommend, above all, to simply start putting money aside. Even a general savings account will do. Every business is different. Consult a broker or business professional for the best retirement plan actions based on your goals.

Other Tips for Retirement for Self Employed Workers

  • Stay On Top of Taxes. Keep a good record of your taxes throughout the year to ease the burden of tracking taxes. Doing so also makes it easier to write off taxes as a self-employed worker.
  • Pay Yourself First. Put money aside for your retirement before doing anything else with it. That’s what it means to pay yourself first. It’s a part of how to manage your finances, and it’s an essential step when striving toward your goals.

If you’re interested in better improving your financial health and literacy as a self-employed worker, check out some of Moves’ products and resources tailored specifically to the unique, empowering work that you do!

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