Retirement Plans for Self-Employed

While self-employment has many rewards, one of the concerns of this population includes investing in retirement plans. While entrepreneurs are doing what they love and getting paid for it, they must deal with many financial challenges that don't come with traditional employment, including planning for retirement. According to a study by TD Ameritrade, 70% of self-employed individuals aren't saving for retirement. Out of roughly 10 million entrepreneurs and private contractors currently working, seven million adults are not planning their financial futures. While some view saving for retirement as a lost cause when it comes to being self-employed, it is still possible to put away money for the golden years. Retirement plans for self-employed business owners and contractors can include a number of investment opportunities. The two most popular investment strategies for the self-employed are a SOLO 401k and a Simplified Employee Pension (SEP). Consider these questions when researching retirement plans for self-employed business owners and contractors.

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  1. What is the contribution limit for a SOLO 401K?
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    Entrepreneurs are both an employer and employee, so they can contribute both ways to their 401k accounts. The limit for employees is $18,000 per year. Business owners can then add 25% of the business's profits on top of that as the employer. The maximum annual contribution limit is $53,000. Like a traditional 401K, all contributions are pre-tax. After set up, people can contribute as little as they want each year.

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  2. What is the contribution limit on a SEP?
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    The limit for contribution is based on the W-2 amount that the business owner pays themselves. Each year, they can put 25% of that income into the retirement account. If your income is based on Schedule C, you can deposit 20% of the total income. The maximum contribution each year, like a SOLO 401K, is $53,000. With a SEP, you can increase the amount you put in as you increase you annual profits. Basically, you can reward yourself in retirement for being more successful. SEP contributions are also pre-tax.

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  3. How do Employees factor into a SEP plan?
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    You must contribute the same percentage to employee retirement accounts as your own. This is something that all business owners must consider. If a business has a high number of employees, a SEP plan can be very expensive and become cost prohibitive. This is why many prefer a SOLO 401K.

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  4. Can Anyone get a SOLO 401K?
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    No, only those that don't have employees can open a SOLO 401k. There is one exception to this rule. An individual may list their spouse as an employee. They can make contributions for their spouse into the account. This does not alter the maximum contribution limit. In short, companies with employees cannot open a SOLO 401K.

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  5. Who benefits the most from a SOLO 401K?
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    Those in lower tax brackets reap the highest rewards when they invest in an individual 401K. This is because they put the tax dollars in their account early. Most people grow into higher brackets over time. This creates a lot of value when they withdraw the money and it is finally taxed.

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  6. Why are retirement accounts a good way to save?
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    You could choose a more traditional savings account to save for retirement. Retirement accounts usually bring bigger savings, though. This is primarily because it is harder to withdraw money from a retirement account. If you can't touch it, you're less likely to use it.

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  7. Which account is easier to open?
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    The SEP account is easier to open than a SOLO 401K. One reason is because everyone is eligible for it, even if they have employees. The process is also simple when it comes to paperwork. The most favorable aspect of a SEP compared to a 401K is there is no annual reporting to the IRS.

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  8. Are retirement accounts susceptible to capital gains tax?
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    No. Unlike other savings accounts, investors cannot be taxed on their profits from interest. This can lead to thousands of dollars in savings when the individual withdraws their money. Since you aren't making money in retirement, you will be in a lower tax bracket. There are also other tax benefits. This leads to even less taxed income.

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