You have your business and are enjoying the freedom of being able to be the “boss.” Having your retirement plan in place is just as important as managing that business the right way. When you work for yourself, it is even more important to put money away as if you were working a standard 9-5. It’s important to calculate your estimates on how much you will need for retirement. Many business owners don’t consider this thought in the beginning, as they are focused on making a profit. Years can quickly fly by, and when it’s time to retire, there is nothing there.
These options will help you select the type of account that would work best. Here are a few options:
A traditional or Roth IRA is good for individuals who are saving less than or up to $5,500 a year. There are advantages to both – you will have tax deductions on a traditional IRA that you won’t have to worry about after retirement. With a Roth, there is no immediate deduction and withdrawals after you retire are tax-free. There are limits on how much you can earn when having a Roth IRA.
This option works for those self-employed with only a few employees. The contributions for this in 2018 is up to 25 percent of compensation, or $55,000. There is a $275,000 limit on compensation. Employers must contribute an equal percentage of salary for each employee, and you will also be counted as an employee.
This is good for self-employed people who have no employees. You can contribute up to $55,000 this year, and if you’re over 50, you have an additional $6,000 you can add as a “catch-up” contribution. There are a number of variables that can assist with your contributions, including the special rule for single-member LLCs and sole proprietors: You can contribute 25 percent of net self-employment income. This works just like a standard 401(k). Contributions are made pre-tax and any distributions after age 59½ are taxed.
Defined Benefit Plan
This works for those self-employed individuals who have no employees and a high income. The contribution will be based on how much you will be receiving once you retire, your age, and the expected return on your investments. Contributions are tax deductible in most cases, and the distributions during retirement will be taxed as income.
This retirement option is ideal for business owners who have up to 100 employees. You can contribute up to $12,500, with a catch-up contribution of $3,000 if you are over the age of 50. If contributing to another plan, your contributions cannot exceed $18,500. The contributions are deductible, but any distributions during retirement is taxed. Any contributions you make to an employee account is also deductible as a business expense.
Getting a sound financial plan in place is just as important as having a thriving business. By planning for your retirement, it helps implement sound financial practices and savings habits. Even if it’s a few dollars a month, putting something away for retirement is always better than having nothing at all.
This content is developed from sources believed to be providing accurate information. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security.