Did you know that more than 11.6 million firms are owned by women (according to the American Express OPEN “The State of Women-Owned Businesses 2017”)? While this is an amazing statistic, we think women are only just getting started!!
If you’re one of these women, thank you! You’re an inspiration to all of us, and help show that with hard work, determination, and a belief in yourself, you can accomplish incredible things. So, while you may run your own business and wear many other hats as well, did you know that you ARE able to open a retirement plan for yourself (and potentially your employees)? It’s true! Many entrepreneurs have no idea that they might be able to open a retirement plan for themselves through their established business.
While the type of retirement plan options you may have available largely depends on the nature of your business (number of employees, income, etc.), the important point to remember is that you DO have options. While we know entrepreneurs are incredibly pressed for time and that it may be far too easy to put “open up my own retirement account” at the very end of that to-do list, we’d argue that prioritizing your future financial health is of utmost importance. It doesn’t have to take too much time to set up a retirement plan, and if you choose the one that best suits your needs, your future self will be so, so glad you did.
We’ve listed some of the most common retirement plans for self-employed individuals below:
Simplified Employee Pension Plan (aka: SEP-IRA)
Key benefits:
- You can contribute up to 25% of your gross income (max. $55,000)
- You can get a tax deduction for your contributions and your money grows tax-free while it is invested in the account.
- You may (depending on your income) be able to contribute much more to a SEP-IRA than a traditional or Roth IRA.
- You’re also able to contribute after the business calendar year ends (leading up to the tax deadline).
Who this plan might work for:
- Self-employed business owners with minimal to no employees who have self-employment income.
- Ideal if you are a sole proprietor, are a Subchapter S corporation, run your own small business, or are involved in a partnership.
Solo 401(k) plan
Key benefits:
- You can contribute significantly more to a Solo 401k plan than with a SEP-IRA. For 2018, you can contribute the first $18,500 you earn, and then use a profit-sharing capability to then contribute up to another 25% chunk of your income (up to $55,000).
- You can get a tax deduction for your contributions and your money grows tax-free while it is invested in the account.
Who this plan might work for:
- Self-employed business owner with no non-family employees
Defined-benefit plan
Key benefits:
- In 2018, you can put up to 100% of your compensation in this account (max. $225,000 for 2019).
- You can get a tax deduction for this contribution and your money grows tax-free while it is invested in the account.
- You can contribute significantly more than you would be able to with a SEP-IRA or Solo 401k plan.
Who this plan might work for:
- Slightly older business owners who have a high dependable income and no employees, and feel confident that they can contribute a significant amount of their income each year.
- A higher income single-owner business or family-run business.
- NOTE: this plan is more complicated and should involve the use of a financial professional (advisor/accountant) to ensure it is set up correctly and within the rules of the IRS.
Savings Incentive Match Plan for Employees (aka: SIMPLE IRA)
Key benefits:
- You can contribute up to 3% of each employee’s total compensation (max. $13,000 for 2019).
Who this plan might work for:
- Smaller companies with less than 100 employees.
- An employer who is willing/able to contribute on behalf of their employees (contribution for employees is required under this plan).
Are you a solo-entrepreneur and would like to either set up a plan or know more about what specific options you might have? Contact us today, and we’d be happy to help!
*Note, if you’re over the age of 50, keep in mind that you can contribute more than the normal allowable limit due to a “catch-up” clause. Additionally, the contribution guidelines are subject to change. Please check IRS.gov for updates on limits for 2019.
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