Are you self-employed? If so, you may be living your dream. You set your schedule, run your business the way you like and answer to yourself. You may even get to earn income doing what you love. While self-employment can be challenging, it can also be greatly fulfilling.
Self-employment can present unique challenges, however, especially when it comes to retirement planning. While traditional employees can participate in their employer’s 401(k) plan or pension, self-employed individuals have to do it on their own. That can be a significant burden.
Since you work for yourself, you may believe that you can delay retirement as long as possible. However, that assumption may be incorrect. There’s always the risk that you could be forced into retirement at some point because of illness or injury. Or you may simply decide you want to pursue other activities. Should that time arrive, you’ll be far more prepared if you have a plan in place.
The good news is it’s never too late to take control of your retirement. Below are a few tips to help you get started:
Put your retirement savings on autopilot.
Many people fail to save for retirement because they simply choose to use their money for other needs. It’s easy to fall into this habit. You have normal bills and expenses, many of which may feel more pressing than saving for retirement. As a self-employed individual, you also have the option of investing money into your business.
You may find it’s easier to save for retirement if you take choice out of the equation. Treat your retirement savings like a mandatory expense, and set up automatic transfers to your retirement accounts. That may prevent you from choosing to use those funds for other goals and expenses and, as a result, you will likely see your retirement balances increase quickly.
Open a SEP IRA.
Many people choose to use qualified accounts such as 401(k) plans and individual retirement accounts (IRAs) as their primary retirement savings tools. Most of these plans are tax-deferred, which means you don’t pay taxes on your investment growth as long as the funds stay in the account. Some also offer current tax deductions.
Self-employed individuals have the option of using a SEP IRA. It operates much like a traditional IRA, except with much higher contribution limits. You can deduct your contributions, which could give you a much needed current tax break. Your distributions are taxable, however, and you could face a penalty if you take a withdrawal before age 59½.
As mentioned, a primary difference between the SEP IRA and traditional IRA is the amount you can contribute. In 2018 you can contribute 20 percent of your net income, up to $55,000, to a SEP IRA.1 This entire amount is tax-deductible. Keep in mind, though, that if you have employees, you are required to make contributions on their behalf, too.
Protect your greatest asset.
What’s your most valuable asset? Your business? Your home? Your investments? If you’re self-employed, it may be your ability to work. If you were unable to work, you wouldn’t be able to generate income, pay your bills or save for the future. Disability is a very real threat, and it’s a dangerous risk to your current standard of living and your retirement. The Council for Disability Awareness estimates that 1 in 4 adults will become disabled at some point in their lifetime.2
Consider purchasing disability insurance to minimize this risk. These policies replace your income if you become physically unable to work. If you suffer an injury or illness that prevents you from working, the disability policy pays you some or all of your lost wages. You can use this money to maintain your lifestyle, pay medical bills and even fund your retirement.
Ready to plan your retirement strategy? Let’s talk about it. Contact us today at DSM Financial. We can help you analyze your needs and implement a plan. Let’s connect soon and start the conversation.
Licensed Insurance Professional. This information is designed to provide a general overview with regard to the subject matter covered and is not state specific. The authors, publisher and host are not providing legal, accounting or specific advice for your situation. By providing your information, you give consent to be contacted about the possible sale of an insurance or annuity product. This information has been provided by a Licensed Insurance Professional and does not necessarily represent the views of the presenting insurance professional. The statements and opinions expressed are those of the author and are subject to change at any time. All information is believed to be from reliable sources; however, presenting insurance professional makes no representation as to its completeness or accuracy. This material has been prepared for informational and educational purposes only. It is not intended to provide, and should not be relied upon for, accounting, legal, tax or investment advice. This information has been provided by a Licensed Insurance Professional and is not sponsored or endorsed by the Social Security Administration or any government agency.
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