When you’re self-employed, one of the biggest challenges can be saving for retirement. Here are three things you can do right now to start fixing that.
- Save 40% of your income
Most people will tell you to save 30% of your income for retirement, and if that’s all you can manage, it’s a great place to start. But saving 40% will allow you to put aside 10% extra for a savings fund or other financial milestones.
- Choose the right retirement plan
If you’re not a traditional employee, you may not be familiar with 401(k) or 403(b) accounts, so here’s a crash course.
A 401(k) is a retirement plan sponsored by your employer and funded via pre-tax money. Usually, the employer will match whatever you put in. A 403(b) plan is usually used by tax-exempt organizations and public school employees.
Of course, as a self-employed worker, you don’t have access to employer-matched funds. So you may want to put a little more thought into which type of plan you choose. Here are some options:
SIMPLE IRA: If you have employees
A SIMPLE IRA (Savings Incentive Match Plan for Employees) is a good option if you want to provide retirement savings for yourself and your employees. It allows you to put money into a traditional IRA, and to match your employees’ contributions. In 2023, you can contribute up to $15,500.
SEP IRA
An SEP-IRA (Simplified Employee Pension) may be a good option if you’re a one-person operation. There’s no minimum size requirement for your company, and your contributions are tax-deferred, meaning you won’t owe taxes on them until you withdraw them. In 2023, you can contribute up to 25% or $66,000 of your total income.
Solo 401(k) or One-Participant 401(k)
A Solo 401(k) is just like a traditional 401(k), but it only covers you and, if applicable, your spouse. You can contribute as an employer and employee, which gives you some flexibility in how much you contribute. In 2023, you can contribute $22,500 as an employee, and up to 25% of your income as the employer.
IRA and Roth IRA
The main difference between an IRA and Roth IRA is that the first allows you to skip taxes until you withdraw, while the second allows you to put money in after taxes, making your withdrawals tax-free. In 2023, the contribution limit to both types of IRA is $6,500.
- Don’t be afraid to ask for help
Knowing your retirement plan is completely up to you can be a little scary. Luckily, you can get help from financial and CPA firms. Many will be more than happy to offer you advice on how much you should set aside and which retirement plan is right for you.