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Winter 2023  Volume 15, Number 4        
 

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Retirement Planning When You’re Your Own Boss

Being your own boss comes with perks like flexibility and freedom. But it also means you lack access to traditional employer-sponsored retirement plans.

At its core, that makes retirement saving all the more important because a retirement account can serve not just as a financial cushion but also as a tax-advantaged way to reduce income during peak earning years.

First, determine your retirement savings goal. Online calculators can provide estimates based on factors like current age, planned retirement age, expected expenses, and more. Financial experts recommend planning to replace 60-80% of preretirement income. Once you’ve set a savings target, it’s time to pick retirement accounts. Self-employed workers have several solid options.

Traditional or Roth IRAs

IRAs make an excellent starting point early on. You can open one easily online through a brokerage firm.

Annual contribution limits are relatively low at $6,500 in 2023 ($7,500 if age 50 or older). But IRAs feature valuable tax perks.

With a traditional IRA, you get an upfront deduction on contributions. The trade-off is paying income tax on withdrawals in retirement. Roth IRAs work the opposite way. There’s no initial tax break for contributions, but qualified withdrawals are 100% tax-free.

Experts often recommend Roth IRAs for those just launching a business. Why? Your tax rate is likely lower now than in retirement. Paying tax on contributions today means tax-free income later.

There’s a catch, though. Income limits can restrict Roth IRA eligibility for high earners. In 2023, the phase-out range starts at $138,000 for single filers and $218,000 for married joint filers.

Solo 401(k)

For significantly higher contribution limits, consider a solo 401(k). Also called an individual or one-participant 401(k), it’s designed for business owners with no employees beyond a spouse.

Thanks to elective deferrals and profit sharing, solo 401(k) contributions can reach up to $66,000 in 2023 ($73,500 if age 50 or older). That’s over 10 times higher than the $6,500 IRA limit.

Solo 401(k)s carry the same pretax perks as a workplace 401(k). You deduct contributions today and pay income tax on withdrawals later in retirement.

SEP IRA

Like a solo 401(k), a Simplified Employee Pension (SEP) IRA offers substantially higher contribution limits than a standard IRA - up to $66,000 in 2023.

SEPs work well for sole proprietors or businesses with limited employees. Account setup and administration are fairly simple.

But there’s a catch. Employer contributions must be proportional for all employees. If you contribute 10% of your compensation, you must contribute 10% for each employee, too.

SIMPLE IRA

The SIMPLE IRA targets small businesses with up to 100 employees. Employees can fund them through salary deferrals.

In 2023, workers can defer up to $15,500 plus a $3,500 catch-up contribution if age 50 or older. Employers must also make either:

  • A matching contribution up to 3% of compensation
  • A fixed 2% contribution for all eligible employees

Maximum total contributions are lower than solo 401(k)s and SEPs. But SIMPLE IRAs offer business owners an employee participation perk.

Defined Benefit Plans

Also called cash balance plans, defined benefit plans function somewhat like pensions. Annual contributions are actuarily determined based on desired retirement income.

This allows very high contribution levels, sometimes upward of $200,000 for older high earners.But defined benefit plans also come with hefty administrative costs.

They work best for established high-income solo entrepreneurs seeking to accelerate retirement savings. The plans require multi-year funding commitments, too.

Choosing a Retirement Account

With so many solid options, how do you select the right retirement plan? Here are key factors to consider:

  • Income level and tax rate - A Roth IRA makes more sense if earning less now versus retirement.
  • Employee status - Solo 401(k)s and SEPs are better for businesses with no employees. SIMPLE IRAs and defined benefit plans can include employees.
  • Savings goals - Solo 401(k)s allow the highest contributions for those seeking to maximize retirement savings.
  • Startup stage - An IRA is an easy starting point for a brand-new business.
  • Administrative needs - SEPs involve minimal paperwork compared to solo 401(k)s.

Opening and Funding Retirement Accounts/p>

Once you’ve selected an account, the next step is setting it up and making contributions. This process looks similar across plan types:

  • Research brokerages and institutions that offer the account.
  • File any required paperwork with the IRS to establish the account. Certain accounts like solo 401(k)s and defined benefit plans involve extra documentation.
  • Arrange automatic contributions from business accounts or personal checking. Consider setting up recurring monthly transfers.
  • Make sure to fund accounts by the tax filing deadline, which is typically April 15. You can contribute up to this deadline for the previous tax year.

Please call us for help and more information.

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In this issue:

This Just In... Can You Still Retire Comfortably in this Economy? Tips to Get Back on Track

Retirement Planning When You’re Your Own Boss

The Self-Employed Person’s Guide to Navigating Health Insurance

Five Life Insurance Don’ts: How to Avoid Putting Your Family at Financial Risk

New 401(k) Superpowers: How Your Plan Will Work Smarter for You

 

 

 


The information presented and conclusions within are based upon our best judgment and analysis. It is not guaranteed information and does not necessarily reflect all available data. Web addresses are current at time of publication but subject to change. SmartsPro Marketing and The Insurance 411 do not engage in the solicitation, sale or management of securities or investments, nor does it make any recommendations on securities or investments. This material may not be quoted or reproduced in any form without publisher’s permission. All rights reserved. ©2023 The Insurance 411. www.theinsurance411.com Tel. 877-762-7877.