This week on Worth It, Dustin and Danielle are kicking off a new series called “Self Employment + Retirement.” Over the next three weeks, they’ll be talking about everything entrepreneurs and self-employed people need to know about retirement, from savings to a work-optional lifestyle to what to expect when you retire.
First, though, they’re talking about the different retirement savings options you have when you work for yourself — and they break each one down to determine which is best for you.
[04:05] Why having a financial advisor can help with you choose between accounts
[05:24] Four options for retirement accounts for self-employed individuals
[05:48] Why 401(k)s may not be relevant to self-employed people
[07:22] The nuts and bolts of an IRA
[08:38] Why an IRA is like a “home base” for your savings
[10:04] Special cases where you can pull money out of your IRA before retirement
[10:28] How IRAs and Roth IRAs differ
[13:54] The difference between SEP IRAs and SIMPLE IRAs
[14:50] Using employee and employer contributions to maximize your savings
[16:30] Three different ways to contribute to a Simple
[18:05] The maximum you can save with a SEP (hint: it’s a lot)
[19:50] Stacking accounts to get the most out of your savings plan
[20:30] Why you aren’t stuck with just one account forever
There are a ton of retirement account options out there, but when you’re self-employed, it’s helpful to whittle down the options to the ones that are most relevant. In this episode of Worth It, that’s exactly what Dustin and Danielle do.
While most people consider a “401(k)” to be synonymous with a retirement account, they’re not always ideal for self-employed individuals. Dustin and Danielle explain why — and, instead, recommend four accounts for self-employed people
Four options can still be overwhelming though, which is why they break these down into two different categories:
If you work for yourself and mostly by yourself, you’ll have a fairly simple approach to retirement. You can open IRAs or Roth IRAs accounts and contribute to them just like a savings account, but which is right for you?
An IRA is just an account type. It’s not an investment. You can contribute to it — up to $5,500 a year as a single person — and get a tax benefit. As an added bonus, if you have old 401(k)s or retirement accounts from previous employers, you dump them into your IRA.
Dustin and Danielle explain that, with an IRA, you can invest within the account but usually won’t be able to touch the money until you’re 55. This is tax-deferred, so when you pull money out over 55, you pay income tax on that later. You can also get a tax deduction on what you contribute to your IRA, but only if you make less than a certain amount. Dustin and Danielle give you all the deets in the episode, so make sure to take notes!
The second account, a Roth IRA, has about the same general benefits of an IRA. However, there is one major difference: If you hold for at least 5 years, and are at least 59 years old, the money you pull out of your Roth can be 100% tax-free. Because a Roth is an after-tax contribution, you may want to start a Roth if you know your income will be higher later in life. This is especially great for entrepreneurs who are just starting out and plan to make a lot of money over their lifetime. That way, you don’t have to withdraw money at your new, higher income tax bracket.
The one downside to a Roth is that, for very successful self-employed individuals, you can’t contribute to a Roth if you make over a certain amount. If you’re making a lot of cash, tune into the episode to see if you qualify to contribute to a Roth.
Do you have more than a handful of employees working within your business? Dustin and Danielle explain why Simple IRAs and SEPs may be your best bet for retirement savings (for you and them).
Any business owner with one or more employees, or anyone who makes freelance income, can open a SEP. Contributions are tax-deferred (meaning you don’t pay taxes until you pull it out) as well as tax-deductible for the business or individual. For businesses, this is a great deduction, but it may not be right for everyone. Dustin and Danielle give a few reasons why in this episode of Worth It, and recommend SEPs for businesses with only a couple of people on the payroll. Make sure to tune in to the episode if you’re curious!
Simple IRAs are, well, simple. Even Dustin and Danielle have one. With a Simple IRA, the employee and employer can both contribute, but the majority is contributed by the employee. There is a $12,500 per year contribution limit for employees, but employers can contribute up to 3% of the employee’s compensation. There are also 2 other ways to contribute to a Simple IRA as an employer, so make sure to listen to the episode for more info.
Dustin and Danielle have talked about the difference between 401(k)s, Roths, and IRAs in a past episode, but this one gives you self-employed folks a ton of actionable information to help you determine which account is right for you. If you’ve been thinking about savings accounts that will help you live a work-optional lifestyle, this is a great episode to listen to.
Make sure to bookmark the episode or takes notes, as well, so you can have the information you need when you go to open your account. And if you’re in need of a little more help, you can contact a CERTIFIED FINANCIAL PLANNER™ with questions.
This material is for general information only and is not intended to provide specific advice or recommendations for any individual.
What if you had a clear formula to help you figure out how much to save… while paying down debt and enjoying life? It is possible… when you know your numbers.
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