Does Self-Employed mean Forever Employed? We hope not…

Over 10 million Americans are self-employed. Our firm specializes in working with these individuals to grow their businesses and optimize their tax situation. Between running the business, getting financial records in order, and managing tax liability there is one important part of their plan for success that is often overlooked: retirement savings. Just like planning for taxes, planning for retirement is a key component in being able to walk away from business when you are ready. An alarming recent study by TD Ameritrade found the following:

  • 40% of self-employed individuals are not regularly saving for retirement.
  • 28% of self-employed individuals are not saving for retirement AT ALL.

The common reason cited for not saving for retirement was “irregular income”. All too often improper budgeting and savings can result in retirement planning being put on the back burner due to unexpected capital expenditures, tax bills, and other personal life events. We help our clients plan for tax bills and recommend retirement planning options, but most are aware they need to be saving for retirement but are not doing so.

If self-employed individuals are not saving for retirement will they ever be able to retire?

They may be able to retire, but not maintain the lifestyle that they have become accustomed to. Also with the underfunded status of the social security system retirement planning is more important than ever.  According to the TD Ameritrade study only 14% of business owners believe that they could sell their business in the future and live off the profits from the sale. If the business sells in the future for a profit, it should be a supplement to retirement savings, not the entire plan.

What are self-employed retirement plan options?

  • Traditional and Roth IRAs – Can contribute up to $5,500 per individual per year as long as both have earned income. If the business generates a loss then IRA contributions cannot be made since there is no taxable earned income. Contributions can be made up until the due date (including extensions) of the individual tax return.
  • SEP (Simplified Employee Pension) IRA  – Can contribute as much as 25% of net earnings from self-employment up to $52,000 for 2014. Taxpayers have until the due date (including extensions) of the individual income tax return for the year to set up this type of plan.
  • Individual/Solo 401(k) – Salary deferrals up to $17,500 with total contribution rates as much as 25% of net earnings from self-employment up to $52,000 for 2014. Solo 401(k) plans can have Roth options, but remember these plans provided no immediate tax benefit.
  • SIMPLE (Savings Incentive Match Plan for Employees) IRA – Can contribute all net earnings from self-employment in the plan up to $12,000 in salary deduction. There is typically either a 2% fixed contribution or a 3% matching contribution requirement for these plans. Note that this option requires salary deduction so would be tailored for business owners taxed as a S Corporation.

Regardless of the plan chosen, business owners need to make retirement planning a priority. Retirement contributions should be part of every self-employed business owner’s budget just like other costs to the business. Aside from the current tax benefits of retirement planning, enjoying a long retirement will only be possible if proper planning is done now.   As is usually the case, the devil is in the details so be sure to discuss any plans you consider with a professional to make sure it is best for your situation.