Saving for retirement is vital for everyone. If you are self-employed the duty of setting up a retirement account falls solely to you. To decide whether or not to open your own retirement account, you should weigh the benefits and costs. You should also consider what will happen if you reach retirement without any savings.
With a self-employment retirement account, you can enjoy the benefit of controlling your own savings. You have the flexibility to choose the account that fits your preferred contribution level. These accounts also offer more investment opportunities than a regular 401K plan where your options are limited to what your employer offers.
Many self-employment retirement accounts also offer higher contribution levels. In fact, with a Solo 401K plan, on top of the standard 401K employee contribution amount of $16,500 ($5,000 more if you are over 55), you can also contribute 20% of your business income up to $49,500 each year. These higher contribution levels allow you to save more and receive a bigger tax break.
When you work for a company, your employer handles your retirement account for you. Funds are simply taken from your paycheck each pay period. You don’t have to worry about the headache of paperwork and account maintenance.
If you have your own retirement account, you are responsible for the nightmare of paperwork that goes with it. To lessen the burden, you may prefer an SEP-IRA, which is the simplest to set up and maintain. For Solo 401K plans, paperwork is more intense and you will have to file a special tax return if your account reaches $250,000. If you choose a Defined Benefits Plan, you may have to hire a financial specialist to help you set up the plan.
During Retirement Years
If you are self-employed and you choose not to open your own retirement account, you will affect your retirement income. Unless you also have another job where you have a 401K, you should be saving part of your self-employment income for retirement. If your only income is through working for yourself and you do not save money, you will only have social security to pay your bills. Since social security only covers at most 40% of your pre-retirement income, you may face financial hardships.
Attorney at Law
- Why Do You Need a Lawyer to Plan Your Estate? - September 15, 2022
- Lessons Learned From the Estate of Zappos Multimillionaire Tony Hsieh - September 13, 2022
- Are You Aware of the VA Aid and Attendance Pension? - September 8, 2022