Retirement Savings: What's a Self-Employed Person To Do?
BY: Daniel M. Savage
1. Traditional Individual Retirement Account (IRA). The Employee Retirement Income Security Act of 1974 allows you contribute money to a tax-deferred account held at an investment firm or a bank. Contribution limits for 2019 and 2020 are $6,000 annually if you’re under 50. If you’re 50 and older, a $1,000 catch-up provision is available, thereby raising the total to $7,000. Here are a few important points to remember:
- Investment options include mutual funds, stocks, bonds, exchange-traded funds, and bank deposit products.
- By contributing the maximum allowable amount and starting early, one can accumulate a substantial retirement benefit. For example, a single 30-year-old can amass more than $1 million by contributing the maximum amount and earning 7% over 40 years.
- Even if your spouse has access to an employer retirement plan, you can contribute to an IRA if you have earned income.
- You may not contribute more than you earn.
- You may be able to deduct your IRA contributions. (Please feel free to contact a Wealth Manager for more information on deductibility.)
2. Roth IRA. For younger self-employed and other individuals who can benefit from many years of tax-free growth, the Roth IRA may be a better option. If you’re 59 ½ or older and have had your Roth IRA for at least five years, all withdrawals are tax-free.
4. Simplified Employee Pension (SEP) or SEP IRA. This approach may merit consideration if you’re planning to hire a small group of employees. Individual SEP IRAs are the funding vehicles for employee accounts, but only employer contributions are permissible.
Contribution limits are very generous. With an SEP, in 2020, an employer may contribute up to 25% of an employee’s gross annual salary or $57,000, whichever is less. Self-employed business owners can contribute up to 20% of their net adjusted self-employment income, provided the contributions do not exceed $57,000.