{"id":7850,"date":"2019-11-18T07:57:24","date_gmt":"2019-11-18T11:57:24","guid":{"rendered":"https:\/\/kerryhannon.com\/?p=7850"},"modified":"2019-11-18T07:59:30","modified_gmt":"2019-11-18T11:59:30","slug":"4-retirement-accounts-for-the-self-employed","status":"publish","type":"post","link":"https:\/\/kerryhannon.com\/?p=7850","title":{"rendered":"4 Retirement Accounts for The Self-Employed"},"content":{"rendered":"
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I\u2019ve been self-employed for more than 15 years, and I\u2019ve never looked back.<\/div>\n<\/div>\n
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I can\u2019t put a dollar figure on the riches I gain from the freedom I have to work when and where I want, to choose my clients and select projects that permit me to focus on my mission, my \u201cwhy,\u201d as fans of the author Simon Sinek<\/a> can relate.<\/p>\n

But there are two features of working in-house that I genuinely miss \u2014 an employer\u2019s 401(k) retirement plan that made it easy to save for retirement by automatic payroll deduction, and the fact that my employers tossed in funds to match a portion of my contributions. That was sweet. Saving became a habit. It was out of sight, out of mind.<\/p>\n

Read on MarketWatch<\/strong><\/a><\/p>\n

When you work for yourself, paychecks are often erratic, and it can be a squeeze to set the money aside on a regular basis for retirement \u2014 even if it\u2019s tax-deferred. There\u2019s a fear that you may need those funds and the idea of having to pay a penalty to withdraw them is a turnoff. (Generally, early withdrawal from an individual retirement account (IRA) prior to age 59\u00bd is subject to being included in gross income plus a 10% additional tax penalty.)<\/p>\n

That said, there are a handful of ways self-employed folks like me (and you) can save for retirement in tax-favorable accounts without too much angst. More on this shortly.<\/p>\n

First, the backdrop. The Transamerica Center for Retirement Research report on the self-employed and retirement found that only 55% of the self-employed indicate they consistently save for retirement<\/a>, while 30% save from time to time, and, shockingly, 15% say they never save.<\/p>\n

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Of those who are saving for retirement, relatively few are saving in tax-advantaged retirement accounts. Only 31% are saving in a traditional or Roth IRA, according to the report. And only 40% expect retirement income from typical retirement accounts such as 401(k), 403(b), or IRA plans.<\/div>\n<\/div>\n

One positive note: among those currently saving for retirement, they\u2019re socking away 15% (median) of their annual income.<\/p>\n

The truth, and I confess I fall into this line of thinking from time-to-time, is aside from the anxiety of perhaps needing the money today, many self-employed workers don\u2019t feel a real necessity to have gobs of money set aside for their future financial security. They\u2019re counting on working well past the traditional retirement age, and figure they ultimately have fewer nonworking years to bankroll.<\/p>\n

Almost seven in 10 self-employed (68%) expect to retire after age 65, or do not plan to retire, according to the survey. And interestingly, they\u2019re more likely to cite healthy-aging (83%) than financial (72%) reasons for doing so.<\/p>\n

As a consequence of the \u201cstay-on-the-job\u201d longer attitude, it would seem, only 29% of the self-employed prefer not to think about or concern themselves with retirement investing until they get closer to their retirement date, compared with 42% of employed workers.<\/p>\n

And they\u2019re good with that approach: 65% of the self-employed are confident that they will be able to fully retire with a comfortable lifestyle, including 24% who are \u201cvery\u201d confident and 41% who are \u201csomewhat\u201d confident. While 63% of employed workers are confident, only 18% are \u201cvery\u201d confident and 45% are \u201csomewhat\u201d confident.<\/p>\n

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Catherine Collinson, Transamerica Center for Retirement Studies.<\/figcaption><\/figure>\n

\u201cThe self-employed have an inspiring vision of aging and retirement,\u201d Catherine Collinson, CEO and president of the nonprofit Transamerica Institute and Transamerica Center for Retirement Studies, told me. \u201cCompared with employed workers, the idea of retirement isn\u2019t as relevant, because they have far greater freedom to continue working \u2014 or retire \u2014 on their own terms.\u201d<\/p>\n

While that\u2019s all well and good, \u201cit doesn\u2019t let them off the hook for saving and planning,\u201d she said. \u201cIn fact, it requires serious strategizing. When asked about their retirement strategy, only 18% of the self-employed have a written plan.\u201d<\/p>\n

Regardless of how promising you envision your work life\u2019s longevity, if you\u2019re among the four in five self-employed who haven\u2019t done so already, I recommend crafting a detailed financial plan for retirement. While no one has a crystal ball, I\u2019ve found running the numbers and looking ahead is motivating at any age.<\/p>\n

If you aren\u2019t comfortable doing it yourself, you might opt to hire a financial adviser to guide you Even though I have a grasp of personal finance, my husband (who is also self-employed) and I work with a financial planner who helps us to regularly do the practical and soul-searching work to estimate our savings and retirement income needs and to envision the life we\u2019d like to lead in our later years.<\/p>\n

I recommend one with the Certified Financial Planner (CFP) designation. A few searchable databases: the National Association of Personal Financial Advisors, The Garrett Planning Network, the Financial Planning Association and the Certified Financial Planner Board of Standards.<\/p>\n

That process has become our safety net in case our world shifts. \u201cYou need to have a Plan B<\/a> in case you\u2019re forced into retirement sooner than expected,\u201d Collinson said. \u201cOnly 31% of the self-employed in our report have a backup plan in the event they are unable to work before their planned retirement.\u201d<\/p>\n

4 retirement accounts for self-employed workers<\/h6>\n

I agree wholeheartedly with Collinson. Retirement savings is nonnegotiable. These retirement accounts are available at most mutual-fund companies and brokerage firms. You can set one up online and then contribute via an automatic funds transfer from your checking or saving account.<\/p>\n

You can put as much as $6,000 in 2019 (plus an additional $1,000 if you\u2019re 50 or older) into a traditional or Roth IRA. With a traditional IRA, your contributions are tax-deductible, and the growth is tax-deferred. But if you have a spouse covered by a plan, income limits may apply; for more details, check the IRS website<\/a>.<\/p>\n

With a Roth IRA, your contributions are not tax-deductible, but your money grows tax-free, and you\u2019ll pay no taxes on your distributions as long as you follow the withdrawal rules. (Generally, you must have held the account for five years and be 59\u00bd or older.) Income limits for Roth IRAs<\/a>: If you are married filing jointly, you must have modified adjusted gross incomes below $193,000 this year to make a full contribution. Single taxpayers must have a modified gross income below $122,000 to qualify.<\/p>\n

A simplified employee pension or SEP IRA is a tax-deductible retirement plan<\/a>, if you\u2019re a single employee. For 2019 tax returns, you can contribute up to 25 percent of your compensation or $56,000.<\/p>\n

A one-participant or solo 401(k)<\/a> is a retirement plan for self-employed people without employees (a spouse is an exception). This year, you can set aside, pretax, up to 25 percent of your pay, but your total contribution can\u2019t exceed $56,000.<\/p>\n

Of course, there\u2019s nothing wrong with aiming to work past your 60s and into your 70s. I certainly do. That makes it possible to add to retirement accounts and to sidestep tapping into them for living expenses. That\u2019s the safety net.<\/p>\n

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by KERRY HANNON, <\/b>COLUMNIST<\/h3>\n
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Kerry Hannon is the author of \u201cNever Too Old to Get Rich: The Entrepreneur\u2019s Guide to Starting a Business Mid-Life.<\/a>\u201d She has covered personal finance, retirement and careers for the New York Times, Forbes, Money, U.S. News & World Report and USA Today, among other publications.<\/p>\n<\/div>\n<\/div>\n<\/div>\n<\/div>\n

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