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four Methods To Save For Retirement With out A 401 (ok)

14, 2020

8 min read

The opinions expressed by the entrepreneur's contributors are their own.

This is the second in a series of original Laura D. Adams columns for that will be published two Mondays a month. And don't forget about Amazon | Acquire a copy of Adam's newest book for Entrepreneur Press, Money-Smart Solopreneur: A Personal Finance System for Freelancers, Entrepreneurs, and Side-Hustlers, Barnes & Noble | Bookstore | IndieBound.

Being self-employed gives you some degree of freedom, but it doesn't give you a savings card for retirement. No matter how busy you are, planning a secure future is entirely up to you when you are the boss.

While you might not have a regular job with benefits and a 401 (k), several retirement accounts are designed specifically for solo pensioners and small business owners. These accounts offer tax advantages that you own privately, similar to taxable investment accounts.

Regular contributions to one or more retirement accounts can mean the difference between a comfortable life on the street or just stopping by. Here are four things to consider if you have a part-time or full-time self-employed income.

Related Topics: 8 Online Tools for More Solopreneur Success

1. Traditional IRA

An IRA (Individual Retirement Account) is intended for individuals (and non-working spouses) who have income from their own business or a W-2 job. Contributions to "traditional" accounts are tax deductible, even if you do not include any deductions on your tax return. You manage every aspect of the account, such as: B. the selection of investments and your contribution amount.

For example, if you make $ 60,000 and contribute $ 6,000 to a traditional IRA, you will only pay tax on $ 54,000 of income. In addition, investment income is not taxed until you withdraw it. You can open a traditional IRA with many financial institutions (e.g. banks, investment firms, and insurance companies) by transferring money or by renewing a traditional retirement account with a previous employer.

Prime Pro: You can use a traditional IRA to defer taxes on both contributions and account earnings.
Main issue: If you or a spouse is on a company retirement plan such as 401 (k) or 403 (b), some or all of your contributions to a traditional IRA may not be tax deductible based on your income.
Rule to Remember: You can contribute up to $ 6,000 for 2020 and 2021, or $ 7,000 if you are over 50.

2. Roth IRA

A Roth IRA has many of the same rules that apply to a traditional IRA, with the exception of taxes. Contributions to a Roth IRA are non-tax deductible, which means you will not receive a tax break. However, if your tax rate is now lower than you think it will be in retirement, you can stay ahead.

For example, if you make $ 60,000 and contribute $ 6,000 to a Roth IRA, you must pay tax on $ 60,000 of income. You benefit from retirement benefits when the withdrawals of contributions and income are completely tax-free.

As with a traditional IRA, you can open a Roth with a variety of financial institutions. You cannot transfer funds from a traditional company retirement plan to a Roth IRA without raising taxes. However, you can do a tax-free rollover from an old Roth 401 (k) or Roth 403 (b).

Main benefit: Avoiding taxes on decades of account growth in a Roth IRA can lead to massive savings. You receive the full tax benefit even if you (or a spouse) are on a retirement plan at work.
Key Cons: There is an annual income limit based on your tax return status to qualify for Roth IRA contributions.
Rule to Remember: You can contribute up to $ 6,000 for 2020 and 2021, or $ 7,000 if you are over 50.

3. Solo 401 (k)

A Solo 401 (k) is similar to a regular 401 (k) offered by many companies, but is only available if you are self-employed with no employees other than a spouse. You can contribute both as an employee of your company and as an owner.

Solo 401 (k) are available as a Traditional Account or Roth Account and offer pre- or post-tax contributions. As with a Roth IRA, withdrawals of contributions and retirement income are completely tax-free. But unlike a Roth IRA, no matter how much you make, you can contribute to a Roth Solo 401 (k).

There are many places where a traditional or Roth Solo 401 (k) can be opened, e.g. B. Banks, investment firms and insurance companies.

Prime Pro: A Solo 401 (k) offers a high contribution limit, so it is an excellent option if you have a high self-employed income and no employees.
Main Issue: If you want to hire staff, you will need to complete the IRS paperwork to convert a Solo 401 (k) to a regular 401 (k), which comes with more administrative hassles and restrictions.
Rule To Remember: For 2020, you can contribute up to $ 57,000 or $ 63,500 if you are over 50 to a Solo 401 (k). The limit increases to $ 58,000 or $ 64,500 for 2021.


If you're self-employed and have employees or are planning to hire employees someday, consider a SEP-IRA, which stands for Simplified Employee Pension. This is an option for businesses of any size or for those who are self-employed, with or without employees.

As with a traditional IRA, contributions to a SEP IRA are tax deductible and there is no Roth option. You postpone tax on contributions and income until you make distributions in retirement.

With a SEP-IRA, contributions can only come from you as the employer. Your employees can never bring in their own money. As the business owner, you choose the amount that you want to contribute each year. However, you must give all employees the same percentage of pension contributions that you give yourself.

Say you have a web design company with an employee named Terri. If you put 15% of your salary into your own SEP-IRA, you would also have to put 15% of Susan's wages into her SEP-IRA (in addition to paying her full salary). But if you're having a bad year with little profit, you can choose not to contribute.

You can open a SEP-IRA with many financial institutions by completing Form 5305-SEP, a simple IRS form.

Prime Pro: A SEP IRA gives you the flexibility to contribute in years your business cash flow allows and to opt out when money is tight. As with the Solo 401 (k), a SEP-IRA offers you high contribution limits.
Main problem: If you have employees, you have to fund their SEP-IRAs in an equal percentage of the income as for your account.
Rule to Remember: For 2020, you can make SEP IRA Contributions for each of your employees (including yourself) up to 25% of each employee's compensation for a maximum of $ 57,000. The limit will rise to $ 58,000 by 2021.

Early withdrawals from a retirement account

Most retirement accounts will impose a 10% early withdrawal penalty if for whatever reason you access them before you reach the official retirement age of 59.5. However, under the CARES Act, the penalty for withdrawals up to $ 100,000 in 2020 is waived if you have a hardship related to Covid-19.

For example, if you, a spouse, or child are diagnosed with COVID-19, or have financial problems from being laid off, quarantined, reduced work hours, or closing a business, you are entitled to an exemption from the sentence. While income taxes would still be due on a previously untaxed hardship for retirement, the good news is that you can delay or avoid taxes with the following options:

Pay back the hardship distribution to your account within three years and avoid taxes. Pay taxes on hardship distribution by paying a third of your liability for three consecutive years.

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Since you make post-tax contributions to a Roth, you can withdraw these at any time without penalty. This was the case before the CARES law. However, the earnings on the account are subject to income tax when you withdraw this portion of your balance. So if you have both a traditional and a Roth retirement account and you are facing financial difficulties, tap your Roth first.

Good luck and good luck for the future.

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