Entrepreneurial Retirement Options – Getting True Peace of Mind
At some point in life, every entrepreneur has dreamed of starting their own business. When this newly minted entrepreneur walks away from corporate employment and into the wild west of self-employment, he takes full responsibility for his financial destiny. Gone are the days of contributing to a matching company 401k plan.
These small business owners are now responsible for setting up and contributing to their retirement plan. According to a recent survey by TD Ameritrade, 7 out of 10 self-employed individuals are not saving regularly (if at all) for retirement. I recently spoke with Heather Banks, a Certified Financial Advisor at First Bank Wealth Management in Asheville, North Carolina. Heather shared with me her impressions of how retirement savings have changed over the years. “For too many years, US citizens have relied on Social Security to fund their retirement. Social Security simply isn’t able to fully fund retirement with any realistic expectation of maintaining the lifestyle they’ve grown accustomed to during their working years. it is vital that small business owners take advantage of the retirement benefit options available to them and work with financial professionals (financial advisors, accountants, etc.) to determine which option is best for them.”
There are several programs that a self-employed individual can use to help them achieve their retirement goals.
SEP IRA (Simplified Employee Retirement Plan) is a pension plan that allows a self-employed person or sole trader to make pre-tax contributions. This is a plan that is similar to a traditional IRA. However, this allows you to have a much higher level of contribution. This type of program is one of the easiest to open and maintain. Most banks and investment firms can help you open and maintain this type of account. With this plan, you can contribute up to 25% of your net self-employment income. The contribution limit for 2015 is $53,000. The account opening deadline is April 15 following the tax year.
ROTH IRA is a retirement plan where the contributions you make are not deductible in the year the contributions are made, but they grow tax-free and are tax-free when withdrawn. The maximum contribution in 2015 is $5,500 if you are under 50 and $6,500 if you are over 50. These amounts begin to gradually decrease for high earners, who make $116,000 (single/head of household) and $183,000 (married). The deadline for opening an account is April 15 following the tax year.
SIMPLE IRA Plan (Employee Savings Incentive Plan) is a deferral of the compensation plan. It’s easy to open and maintain at banks and investment firms, but note that it has a lower contribution limit. This plan is good for businesses where the owners have other sources of income as it allows them to set aside a larger percentage of the profit. You can put all of your net self-employment income into the plan up to $12,500 in 2015 through payroll deductions. If you are over the age of 50, you can increase your donations by $3,000. The employer can also contribute up to 3% of the employee’s contribution. This plan is best suited for self-employed individuals with fewer than 100 employees. The deadline for opening an account is October 1.
The SOLO 401(k) Plan. it is easy to open and requires little maintenance. It is intended for businesses without employees and therefore the program is only available to the owner and his/her spouse. This plan follows the same rules and requirements as any other 401(k) plan. You can take up to $18,000 in salary deferrals in 2015, plus an additional $6,000 if you’re over age 50. If you hire employees and they meet the plan’s eligibility requirements, you must include them in the plan and their elective deferrals will be subject to nondiscrimination testing. The account opening deadline is December 31. The program will be required to file an annual report with the IRS if it has $250,000 or more in assets at the end of the year.
For more information on each of these plans, I recommend contacting your local CPA and CFP. They will be able to help you choose which plan is best for you. I agree with Dave Ramsey who said, “I believe that through knowledge and discipline, financial peace is possible for all of us.”
#Entrepreneurial #Retirement #Options #True #Peace #Mind