If the idea of being your own boss and controlling your own earnings makes your heart flutter, your destiny may be to become an entrepreneur. Your experience in the job market or stunted professional achievements may have made you realize that working for others is no longer the life you desire. However, without the benefits that corporate employment often offers, it’s a complicated process to find strategies to help entrepreneurs save for retirement.
While entrepreneurship offers freedom and flexibility, it also comes with some setbacks. These complications include paying for your own healthcare and saving for your own retirement. No longer do you have the extra perks that full-time employment offers. It’s up to you to plan and create the funding for your ideal retirement lifestyle. If you think entrepreneurship is in your future, here are some strategies to help you save for retirement when you work for yourself.
Open a Tax-Advantage Account
Even though you may no longer have access to a company-sponsored retirement plan, there are still plenty of options to help you save for your golden years. If you haven’t already, you should consider opening a tax-advantages account. Here are a few options you can consider:
Traditional and Roth IRA
Traditional and Roth IRAs are both great retirement savings account options for entrepreneurs. Account holders can contribute to a traditional IRA with pre-tax dollars. It’s important to note, traditional IRAs are tax deductible, while Roth IRAs are not.
In retirement you must pay income tax on all traditional IRA distributions. However, Roth IRA distributions are tax-free. A contingency to note, with both IRAs you must be 59 ½ or older in order to take distributions without the 10% penalty.
As of 2019, you can contribute up to $6,000 in your IRA each year. If you’re 50 or older you can contribute an extra $1,000, making your total contribution limit $7,000. However, there are additional contribution limits for taxpayers who earn too much.
Simplified Employee Pension (SEP) IRA
If you’re a business owner who has few to no employees you may want to consider a SEP IRA. You can contribute up to $56,000 in 2019 or 25% of your net self-employment earnings. For reference, there’s a $280,000 compensation limit. Keep in mind, there are no Roth SEP IRAs and all distributions will require you to pay income taxes.
If you have employees, you must contribute an equal salary percentage for each one of your employees, including yourself. For example, if you contribute 4% of your salary to the account, you must contribute 4% of your employee’s salary to their account.
Savings Incentive Match Plan for Employees (SIMPLE) IRA
If you have a larger business with up to 100 employees, a SIMPLE IRA is a good option for saving for retirement.
In 2019, you can contribute up to $13,000 with a makeup contribution of $3,000 for participants 50 or older. Employers can select to contribute a standard 2% as a non-elective contribution, or a 3% match contribution.
All contributions must not exceed $19,000. If you choose the 2% non-elective contribution, your employees do not have to participate in order to receive the contribution. All employee contributions are tax deductible. Keep in mind, distributions taken in retirement are tax applicable, based on your tax bracket.
Also, contributions to employee’s accounts are tax deductible for the business owner as a business expense. Similar to most retirement plans, a 10% penalty applies to any distributions taken before you reach 59 ½. But, if you take a distribution within the first two years of participation in the plan, your penalty will increase to 25%.
One-Participant or Solo 401(k)
A solo 401(k) is a good retirement option for entrepreneurs with no employees. With this option the account holder plays the dual role of employer and employee. Total contributions to the account cannot exceed $56,000 ($62,000 including catchup contributions for participants over 50).
Additionally, your total yearly earning amount is a consideration when determining your contribution limit. For 2019, the earning limitation is also $280,000.
Solo 401(k) plans work similarly to 401(k) plans in your ability to contribute with pre-tax dollars. Then in retirement you will need to pay income tax on all distributions after age 59 ½. You can also decide to open a Roth solo 401(k) which mimics the tax treatment of the Roth IRA.
This account can be beneficial for those who are entrepreneurs and want to save a lot of money throughout their career, or only in a few years.
Establish Automatic Contributions
Automating your retirement savings is one of the best strategies to help entrepreneurs save for retirement. With the busy lives entrepreneurs lead, it’s easy to forget to contribute to their retirement savings. Automating their contributions can help entrepreneurs stay consistent and continue to allow their nest egg to grow over time.
After a while you won’t even miss the contribution amount. It will be as if you’re paying another bill. It may also be beneficial to increase your automatic contribution amount over time. Slowly increasing your contribution will let you ease into automation. It will ease the shock of a large contribution initially.
Diversify Your Portfolio
Many entrepreneurs use their business as a retirement planning option. They assume that when they go to retire, a worthy buyer will be ready to purchase their business for the exact amount they desire. Unfortunately, this perfect scenario may not come to fruition. That’s why it’s important for entrepreneurs to not only focus on building their business, but also focus on building their retirement savings as well.
Diversification is an important element to retirement planning for entrepreneurs. Putting all their eggs in one basket, such as the anticipated sale of a business, can expose them to more risk than they may be willing to stomach. This situation is similar to an employee only purchasing company stock. If the company’s value decreases over time, they may not have enough saved to prosper in their golden years.
Including stocks, exchange traded funds, bonds, real estate, and your business in your portfolio can help you minimize your risk and enable you to prosper in retirement. If you’re unsure how to diversify your retirement portfolio, partnering with a financial planner can help you determine the appropriate asset to reach your retirement goals. More about that in a moment.
Develop a Strategy to Pay for Your Health Care Needs
While you’re busy retirement planning, don’t forget your retirement health care needs. As you age, your health care expenses will increase. Many pre- and post-retirees forget to include health care expenses in their retirement planning process. This can put a large financial burden on them.
The first thing you will want to do to plan for your healthcare costs in retirement is open a Health Saving Account (HSA). If you have access to one of these accounts, they are available with high-deductible health plans. They also offer triple tax advantages including deductible contributions, tax-deferred growths, and tax-free distributions for all qualifying medical expenses.
You can use your HSA funds to pay for certain medical premiums which include Medicare premiums, and long-term care insurance premiums. For more information on a HSA account visit irs.gov.
You may also want to consider purchasing long-term care insurance. This type of coverage is a great way to fill in the gap left by Medicare. Long-term care coverage can help pay for your long-term care needs. Long-term care insurance premiums tend to be more expensive. An alternative option is to buy a life insurance policy that allows you to add a long-term care insurance rider.
Understand the Ins and Outs of Business Taxation
Developing a tax strategy is an important element of anyone’s retirement plan. As an entrepreneur, your strategy may be more complex and need more attention. Whether your business is a Limited Liability Company, a Partnership, or a Corporation, you may have different taxation laws and regulations.
Understanding how your business tax operates is imperative to minimizing your tax burden. Working with a tax professional who specializes in business taxation can help you determine the best strategy for retirement planning. They understand the ins and outs of tax code and how you can best limit your exposure to unnecessary taxes heading into retirement.
Partner with a Financial Planner
Partnering with a financial planner with retirement expertise is one of the best things you can do to boost your financial confidence as an entrepreneur. Financial planners are experts in the finance industry, and they have helped hundreds of people understand and optimize all of the pieces of their financial puzzle to help achieve the life they’ve always dreamed of in retirement.
Not only are financial planners amazing financial resources as you work through the process of creating your retirement plan, they also provide support and guidance when faced with tough business decisions. Financial planners help you see your entire financial picture and suggest options and strategies to aid you in achieving your retirement goals.
The Bottom Line
Planning for retirement can be confusing no matter what career path you choose to take. As an entrepreneur the complexities increase. Partnering with a financial planner can help you strategize all the pieces of your retirement puzzle and set you on a path to financial freedom.
If you’re ready to take control of your financial future and create a plan to increase your odds of success, please contact our team today.