Ways to save for retirement when you are self-employed

If you are self emloyed,you know you have certain amount of freedom which the people who are employed under other companies don’t. But you should also know that as you are not employed under any organization,you will not get any job benefits and a 401(k). No matter how busy you get ,you are the one who would have to plan for the security of your future or after you retire.

Well, to come to your help,there are several retirement accounts which are designed especially for solopreneurs and small business owners. These accounts offer tax advantage but you own them privately similar to taxable investment accounts.

As you contribute regularly to one or more of these retirement accounts,you would ensure yourself and your family a comfortable life after you retire.

Be it a part-time or full-time self employment income you are earning now,you can always make use of the following and bring them into consideration-

Traditional IRA-

IRA stands for Individual Retirement Account. It is for individual and non-working spouses who earn from their own business or a w-2 job. You may or may not itemize your deductions on your tax returns but these traditional accounts are tax-deductible.You are entitled to manage every aspect of the account like choosing investments and contribution amounts.

Investment earnings are not taxed until you withdraw them. You can open account with one or more financial institutions by transferring funds. But there is a pro and con to Traditional IRA.

The pro is that you can use a traditional IRA to defer tax on both contributions and account earnings and the con is that if you or a spouce participate in any workplace retirement plan, some or all of your contributions may not be tax deductible depending on your income.

Roth IRA –

A roth IRA has almost same rules that are applied to a traditional IRA except for the taxes. The contributions made to a Roth IRA are not tax-deductible which implies that you are not getting any upfront tax break.Like a traditional IRA, a Roth IRA can also be opened at various financial institutions when withdrawals of contributions and earnings are entirely tax-free. You can not roll over funds from a traditional workplace retirement plan into a Roth IRA without affecting Taxes.

The main pro to this is Amounts in a Roth IRA can add up to a massive saving and you can get full tax benefits even if you participate in a retirement plan at work.And,the con here is that there is an annual income limit based on your tax status to qualify for a Roth IRA contribution.

SEP-IRA –

SEP stands for Simplified Employee Pension and if you are self employed and have employees or plan to hire staff someday,you should consider using a SEP-IRA . This option is available for any sized business or to those who are self employed with or without employees.

These are similar to a traditional IRA and are tax deductible. With an SEP-IRA , contributions you will make can only come from you as the employer and your employees will never be able to contribute their own money. You can choose the amount of your choise to contribute each year being the business owner.

The main pro here is that a SEP-IRA gives you flexibility to make contributions in years when your business cash flow and allows it to opt out when money is tight. You will get a high contribution limit.and the con here is that if you have employees,you have to contribute equally to your’s and your employee’s account.

 

The bottomline here is that if you have both traditional and roth account and have experienced financial hardship you should better opt for tapping your roth first. Good luck.

 

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