Retirement Planning for Entrepreneurs, Demystified

The number of entrepreneurs and people in the gig economy is growing at a rapid rate. Unfortunately, this also means that retirement savings are decreasing. This is often because entrepreneurs are not aware of their options and how easy it really is to get started.

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If you’re just making the leap to full-time entrepreneur, your first question is probably, “What do I do with my retirement account from my previous employer?” Good news: the money in your old retirement account can go with you! All you have to do is let your former employer know that you would like to roll the money over to a new retirement account. Then, simply open a Rollover IRA at a new company of your choice, such as Fidelity, E*Trade, or Vanguard.

Now that your old money is rolled over, we can create a plan for all the new money you’ll be making and saving. You have a few different options for retirement savings that can give you the tax-deferred growth and tax deductions that we all love. Take a look at the following chart:

 

Type of Retirement Account

Maximum Contribution*

Maximum Contribution if

Over Age 50*

SIMPLE IRA

$12,500 + employer contribution up to $5,500

$15,500 + employer contribution up to $5,500

SEP IRA

20% of compensation or $55,000 (whichever is less)

Same + you can make catch-up contributions to an IRA

Solo 401(k)

$17,500 employee contribution + profit sharing = $51,000 maximum

$23,000 employee contribution + profit sharing = $56,500 maximum

                                                                       *2018 contribution limits—these amounts can change annually.

 

These are the three main types of retirement accounts for entrepreneurs: SIMPLE IRA, SEP IRA and Solo 401k. There are also ROTH IRAs that anyone can make after-tax contributions to, up to $5,500. So, which one of these accounts is best for you? Here’s a quick rundown:

 

Solo 401(k)

This is for you if: You have no employees, are a self-employed business owner, or are a worker participating in an employer’s 401(k) who also has a side business.

It’s cool because: If you are double dipping between your side gig and a full-time job, you can contribute to both plans!

 

SIMPLE IRA

This is for you if: Your income fluctuates or your business has less than 100 employees. Both the employer and employee can contribute to this plan.

It’s cool because: The SIMPLE IRA can be changed to a 401(k) as your company grows.

 

SEP IRA

This is for you if: You have a small business with a few employees or just yourself, and you made some good money last year, but you need a little more time to get your new plan in place. The deadline to set up a plan for 2017 is October 15, 2018 (if you file for a 2017 tax extension).

It’s cool because: As the employer, you can contribute up to 20% of your income, up to a maximum of $55,000. (Cha-ching!)

 

See, saving for retirement can be fun and easy! Just follow the steps above, pick the plan that works best for you and you’re on your way to a smooth retirement.

 

Photo by: Austyn Elizabeth Photography

Dominique Broadway

Dominique Broadway is an award-winning financial planner and personal finance expert. You can find her on "the gram" @dominiquebroadway or at www.dominiquebroadway.com

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