May 22, 2017
Do You Need Retirement Planning When You Are Self-Employed?
Planning for retirement is something that every adult should take very seriously. With the uncertainty of the Social Security system, it is important to have an independent source of income for retirement. Furthermore, most people need more money to continue their standard of living than Social Security provides.
If you are employed, you may have a mixture of employer-sponsored retirement plans and individual retirement accounts. However, if you are self-employed, you do not have an employer to rely on for your retirement planning. It is completely up to you how you plan for retirement.
The IRS announced the 2017 Pension Plan limitations in October of last year. Deciding which of these plans you qualify for and how to set up the plans can be complex. Our Brighton retirement planning attorney can help make sense out of the various pension and retirement plans available to self-employed business owners. Below are four of the popular accounts that you may want to consider if you are an independent contractor or self-employed person who receives 1099 income.
Pension and Retirement Plans for Self-Employed Individuals
- Simple Individual Retirement Account
A Simple IRA can help you boost your retirement savings by allowing you to contribute both as an employer and an employee. Simple IRAs are easy to set up with no annual filing requirements. You will fund the account mostly as an employee; however, some contributions must be as an employer. At this time, a minimum of three percent of your net self-employment earnings must be contributed as an employer contribution.
- Simplified Employee Pension (SEP) Individual Retirement Account
Small business owners can plan for retirement by using the SEP IRA. Contributions to a SEP IRA are tax-deductible, and the interest is tax-deferred until the funds are drawn during retirement. You have until your business tax filing deadline to make contributions. A SEP IRA is easy to set up and maintain. A potential disadvantage is that this type of IRA is limited to employer contributions and the employer must contribute the same percentage of salary for all eligible employees. Therefore, a SEP IRA may be best for small business owners with few employees.
- Defined-Benefit Plan
A defined-benefit plan has the advantage of allowing you to make large annual contributions thereby leading to significant deferrals of income. Another advantage of a defined-benefit plan is the fact that you can have a reliable, steady income during retirement because the plan is based on what you want to receive as income during retirement instead of how much you want to contribute while you work. However, defined-benefit plans can be costly to set up and maintain. You must fund the account each year and offer the plan to employees too.
- Solo 401(k) Account
With a solo 401(k) account, you can contribute funds to your retirement account and so can your spouse if your spouse earns an income from your business. However, the account is only available to self-employed individuals with no employees. With no nondiscrimination testing and high contribution amounts, a solo 401(k) account may be a good option for you. However, this type of retirement account is more completed to set up compared to the SEP IRA or Simple IRA, and you will pay maintenance and administrative fees.
Do You Need Help with Your Retirement Plan? Call The Elder Care Firm of Christopher J. Berry, CELA
Our Michigan retirement planning attorney can help you make sense out of the complex laws regarding retirement plans. We will help you find the retirement plan that is best for you now and in the future.
If you are in the Brighton, Bloomfield Hills, Livonia, or Novi areas, contact our office by calling 888-390-4360 or use our online contact form to request more information or schedule an appointment.