8 Retirement Planning Strategies for Entrepreneurs and Self-employed Individuals
In the complex world of retirement planning, entrepreneurs and self-employed individuals face unique challenges. We’ve gathered insights from eight industry professionals, including Principal Attorneys, CEOs, and Managing Partners, to shed light on this topic. From exploring retirement plans and saving consistently to developing a customized plan with a financial planner, discover the top strategies these experts recommend for a secure retirement.
- Explore Retirement Plans and Save Consistently
- Create Your Own Insurance Company
- Consider the Solo 401(k) Plan
- Diversify and Research Retirement Plans
- Plan Ahead and Consult a Financial Adviser
- Set Up a SEP IRA
- Leverage the Mega-Backdoor Roth IRA
- Develop a Customized Plan
Explore Retirement Plans and Save Consistently
Multiple retirement plan options are available for business owners and even self-employed entrepreneurs. Firstly, you should review the retirement plans to decide which will work for you. Options here include Simple IRAs, Roth IRAs, Solo 401(k)s, and SEP-IRAs—see their terms, associated fees, interest rates, and more. Based on the information you find, you will know how long and how much to save for optimal security in the later years.
You should start saving around 10-15% of your total income and do so consistently over the years. There are free and paid online budget calculators available to use. These can measure your progress based on your input information, like annual income, existing retirement balance, etc. Keep track of how much you save using these tools per month.
Create Your Own Insurance Company
Entrepreneurs can create their own insurance companies, deduct insurance premiums as a business expense, and build a tax-advantaged retirement fund. By establishing a captive insurance company, entrepreneurs can contribute funds to the company as premiums, reducing their taxable income.
The insurance company can invest these premiums and grow the funds tax-free. In retirement, entrepreneurs can receive distributions from the insurance company as a source of retirement income. This strategy offers a unique and less commonly known approach to retirement planning for entrepreneurs and self-employed individuals.
Consider the Solo 401(k) Plan
A Solo 401(k) is a retirement savings plan for self-employed individuals or small business owners without employees. It allows them to contribute both as an employer and an employee, potentially saving more money. Entrepreneurs may not know about it due to limited awareness or assuming it’s only for larger companies, not realizing its benefits for sole proprietors or independent contractors.
Diversify and Research Retirement Plans
Diversify! There will be years where real estate is up and stocks are down. There will be years where stocks are up and real estate is down. Most people think retirement is an either/or between real estate and stocks. Balance is the key.
Also, researching the types of self-employed retirement plans is key. If you’re a high-income earner, you’re better off looking at a SEP IRA than a 401K since the contribution limits are higher. However, if you have a team, you might need to consider a plan that’s inclusive of everybody. If you want to have an IRA but also be in real estate, looking into self-directed IRAs can be a great decision if done early enough!
If you plan ahead for your current AND future needs, you won’t find yourself in a position of prematurely withdrawing from IRAs, taking out 401K loans, or paying unnecessary taxes. Always do your research and consider what levels of flexibility, autonomy, and control you want over your investments.
Plan Ahead and Consult a Financial Adviser
For an employee of a company, a retirement plan is usually part of the package deal. However, for entrepreneurs or people who are self-employed, having an actual retirement plan is not always a prominent part of your initial plans.
Therefore, you need to take the initiative to plan ahead. Start by having an idea of when you hope to retire and what you plan on doing with your business when you reach that stage.
From there, set a realistic goal and speak to a financial adviser as to the number of investment and saving options that are suitable to your career path.
Set Up a SEP IRA
For entrepreneurs that set up a SEP IRA, the contribution limit is quite high. This is a great way to give especially small entrepreneurs a leg up in retirement planning, dominated by company 401(k)s at larger firms.
For solopreneurs, it’s very attractive, since you can set the policy and apply it to yourself based on your own financial needs. When you bring on employees, you’ll want to have a conversation ensuring their mindset and retirement goals are similar, that way they’ll be on board with the retirement contribution, which will need to be an even percentage across the organization.
Leverage the Mega-Backdoor Roth IRA
One retirement planning strategy for entrepreneurs and self-employed individuals that people may not be aware of is participating in a mega-backdoor Roth IRA. This is a plan which allows those who make too much money for traditional IRA contributions to take advantage of annual after-tax contributions up to the IRS’ maximum contribution limit, resulting in tax-free growth and withdrawals when you retire.
For example, an individual would be able to contribute $19,500 plus applicable catch-up amounts if they’re eligible (2020) through their 401(k), then turn around and do another $6,000 after-tax Mega Backdoor Roth Contribution on top of that. This allows them powerful tax savings opportunities long before they retire.
Develop a Customized Plan
One retirement planning strategy for entrepreneurs and self-employed individuals that people may not be aware of is to work with a financial planner to develop a customized retirement plan.
A financial planner can help you identify your retirement goals and create a plan that is tailored to your needs. Additionally, they can help you set aside money each month in a retirement account so that you can save for the future.
Matthew Ramirez, CEO, Paraphrasing Tool