Preparing for Retirement When Self Employed

Whether you’re an artist or a freelancer, you’ll benefit from looking ahead at your future with retirement in mind. Unlike your salaried counterparts, you don’t get a 401k package with a long-time employer or the promise of a retirement paycheck. So, what can you do? Here are a few different options to consider.

Buy into a Union

Depending on your trade, there may be unions out there that disperse retirement funds or allow you to sign up for group discounts. Do some research in your industry to see what’s available.

SEP IRA

A Simplified Employee Pension Individual Retirement Arrangement (SEP IRA) is a variant of the typical IRA, often used by employers for themselves and their employees. But there’s also a set of rules for a SEP IRA designed for self-employed persons. Funds deposited into an SEP IRA aren’t counted as income for that tax year, since withdrawals are taxed once you reach retirement age. Today, it’s considered as 59 ½, and will be taxed in the years you begin to withdraw it. The limit on contributions usually falls around 25% of your net profit.

Self-Employed or Solo 401k

Though 401ks are considered a staple of a salaried job, there is a self-employed version of this retirement fund. Like an SEP IRA, it acts as a salary deferral, meaning you don’t pay taxes on the money you’ve set aside in your 401k; instead, you’re taxed on your withdrawals during retirement. The benefit is that this type of account allows for a high contribution limit — as much as $61,000. Spouses are also eligible to open a self-employed 401k.

Save, Save, Save

When you can, save money! Though this seems obvious, many people may feel comfortable during profitable periods without adjusting the amount that they save, instead splurging on luxury items they couldn’t afford before. Instead of giving in to the temptation, set aside more money during periods of growth for your self-employed business. Also set aside funds to benefit your business or finances. Consider paying off high interest debt, or investing in areas that will grow your business revenue.

When you’re self-employed, be a good boss to yourself by creating a solid financial picture for today and the years ahead.