I f you are a solo entrepreneur, you are constantly on the go. You may not have time to stop and plan for retirement. Moreover, you may not realize that there are many viable options for a self-employed entrepreneur. Many, if not most, retirement plans seem to be geared toward larger companies with tens or hundreds of employees. However, there are retirement plan options for solo entrepreneurs. We will highlight some retirement planning strategies and several individual retirement plans that may be perfect for you as a solo entrepreneur.
Long-Term Retirement Planning Strategies for Entrepreneurs
Retirement planning is critical for everyone, but even more so for entrepreneurs who may not have access to employer-sponsored plans. Let’s look at some tips for long-term retirement planning.
Start Early
The earlier you start retirement planning, the better your retirement savings will be. It is essential to take the time to plan early for your eventual retirement. Your business may become one of your largest assets, and you’ll need to protect your assets and ensure you fund your post-work life. If you wait too long, you may lose out on savings.
Identify Your Retirement Goals
Each person has different retirement goals. Consider what you want out of your retirement. What age do you want to stop working? Where do you want to live? What kind of lifestyle do you envision having? Answering these questions will help you get an idea of the savings you may need to support the retirement you hope to have. Several online retirement calculators are available to help you develop an estimate of the expenses and savings you may need to plan for.
Hire a Professional
Hiring a financial advisor or certified financial planner to create a retirement strategy can help you save money in the long run and set you up for long-term success. They can formulate a retirement strategy based on your goals.
Identifying your retirement goals, such as age, lifestyle, and location, helps shape your savings strategy.
Retirement Options for Solo Entrepreneurs
If you’re a small business owner or solo entrepreneur, various retirement plans are available.
Simplified Employee Pension (SEP) IRAs
A simplified employee pension (SEP) IRA lets small business owners make tax-deductible contributions on behalf of eligible employees. Employees don’t pay taxes on the amounts an employer contributes on their behalf until they withdraw money from the account when they retire.
Most small businesses can set up a SEP-IRA regardless of the number of employees or the entity’s structure. As a business owner and also considered an employee, you can make contributions to your own account. The benefits of a SEP-IRA include:
Low maintenance. These IRAs have low fees, minimal paperwork, and no annual reporting to the IRS.
Flexibility. These accounts give you much-needed flexibility so you can adjust contributions based on your company’s cash flow.
High contribution limits. Generally, these accounts have higher contribution limits than traditional IRAs. The contribution limit for 2024 is either 25% of the employee’s salary or $69,000, whichever is less.
Tax advantages. Contributions are tax-deductible and can reduce your taxable income.
Some disadvantages to a SEP-IRA include:
No employee contributions—employees cannot contribute to their own SEP-IRA account;
Equal employer contributions—employers must contribute the same percentage to each employee’s SEP account as they contribute to their own account; and
Penalties—SEP-IRA withdrawals are subject to taxes in addition to a 10% penalty for early withdrawals before the age of 59½.
A SEP-IRA may be best for self-employed individuals and small businesses with very few employees or no employees other than the owner.
Solo 401(k)
A one-participant or solo 401(k) is an individual 401(k) plan designed for self-employed business owners without employees. These accounts operate much like a traditional 401(k). You invest in the account with pre-tax money, and your contributions reduce your taxable income. Therefore, the government taxes you as if you make less money throughout the year while you build your IRA. Your earnings grow tax-free until you make withdrawals when you are eligible for retirement.
Benefits
Some benefits of choosing a solo 401(k) include:
Low fees—financial institutions usually charge low fees for their services since a solo 401(k) only supports one or two people.
Large selection of investment options—solo accounts often allow you to invest in a broad range of securities, including stocks, bonds, mutual funds, ETFs, and certificates of deposit.
Larger contributions—since you act as the employee and employer, the IRS allows larger maximum contributions than traditional 401(k)s. For 2024, an employee can contribute up to $23,000, and an employer up to 25% of compensation. Special contribution limits apply to those age 50 or over.
Now, let’s look at some things that are not so beneficial with solo 401(k) accounts.
Disadvantages
Disadvantages to a solo 401(k) include:
Annual filing requirements—if your solo 401(k) has more than $250,000 in assets at the end of the year, you must file a form with the IRS.
Taxes and penalties—penalties apply for early withdrawals.
Contribution limits based on self-employed income—having side incomes can lower your solo 401(k) contribution limit.
Solo 401(k) plans may take more paperwork to set up, but they offer significant flexibility in terms of what you can contribute.
Traditional IRAs
Solo entrepreneurs can also set up a traditional IRA. These are easy to set up and use, there are no filing requirements, and most of the process can be accomplished online. You can use a traditional IRA whether you have employees or not. The main advantage of a traditional IRA is that contributions may be fully or partially deductible, depending on income and filing status.
Some cons to a traditional IRA are:
Lower contribution limits—in 2024, you cannot contribute more than $7,000 ($8,000 if age 50 or older) for the year.
Taxes—you’ll have to pay taxes on withdrawals when you retire.
Forced withdrawals—you can start making penalty-free withdrawals at age 59½, but you generally must begin making withdrawals by the age of 73.
Traditional IRAs are easy to get started and can have significant tax advantages. You may also want to investigate whether a Roth IRA is more appropriate for your business.
Choosing the Right Retirement Plan for Your Business
Identifying the best retirement plan depends on your individual circumstances. No two companies are exactly alike. When researching retirement plans, it is essential to consider your income level, tax bracket, age, risk tolerance, business goals, and ease of use.
Hiring a financial planner or advisor can help you better understand each retirement plan option in light of your specific business and personal goals.
Bizee can help with every other aspect of setting up and managing your business. Bizee has helped over 1,000,000 clients jumpstart and grow their businesses. We look forward to helping you with your business needs.
Disclaimer: Bizee and its affiliates do not provide tax, legal, or accounting advice. This material has been prepared for informational purposes only and is not intended to provide, and should not be relied on for, tax, legal, or accounting advice. You should consult your own tax, legal, and accounting advisors before engaging in any transaction.
