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Key Retirement Planning Tips for The Self Employed

Written By: MB Group

Being a business owner or being self-employed opens the door to a vast range of benefits. You will have more autonomy and control over:

  • The hours you work
  • The people you work with 
  • The type of work you do
  • Your income potential
  • Tax deductions
  • And more.

However, one of the downsides is that you are responsible for everything—including planning for retirement. While most employees have access to a 401(k), 403(b), or other employer-sponsored plans, self-employed individuals must be wholly self-sufficient. Fortunately, there are several tax planning tips for the self-employed you can take to start saving for retirement and planning the future you've always envisioned. Read on for a few key tips you can use to save for retirement.


Create a Plan

Self-employed business owners who fail to plan are indeed planning to fail. As such, one of the first and most critical steps is to develop a plan. Your plan should include:

  • Estimated retirement savings
  • Retirement income needs
  • Long-term care needs
  • Healthcare expenses in retirement
  • Debt payoff numbers
  • Budgetary projections
  • And more

Your plan should also include a contingency plan and an exit strategy in the event you are forced into retirement before you planned. 

Understand the Options for Self-Employed Contractors and Business 

There are a number of different vehicles designed to help you save for retirement. At the MB Group, our CPAs and business planning financial specialists regularly work with self-employed contractors and business owners to create a plan that reflects their individual goals and needs. Here are some of the most common retirement planning tools we leverage for self-employed individuals:

  • Traditional IRAs are perfect for
  • Roth IRAs
  • Solo 401(k)

Let's take a quick look at each. 

Traditional & Roth IRAs for Ideal for Self-Employed Just Starting Out

Traditional and Roth IRAs are very popular solutions for those who are just starting out or those looking to roll their 401(k) contributions from a previous employer. With a traditional IRA, you'll receive a tax deduction on your contributions. On the other hand, the Roth IRA offers no deduction for an immediate contribution, but offers tax-free withdrawals in retirement. The IRA contribution limit in 2023 is $6,500 or $7,500 if you are 50 or older. 

Solo 401(k) May Be Optimum for Self-Employed with No Employees

The Solo 401(k) is a very popular option for self-employed individuals or business owners who have no employees — except a spouse. Also called a one-participant 401(k), this option allows you to save a significant deal of money in the good years and less in others.

 It mimics the tax treatment of a Roth IRA, and many self-employed contractors use this option when their tax rate and income are lower than what's projected to be in retirement. The contribution limits in 2023 are up to $22,500 or $30,000 for those over the age of 50. If over 50, catch-up contributions cannot exceed $66,000 in 2023.

SEP IRA Allows You to Contribute up to $66,000 or 25% of Earnings

The SEP-IRA is also ideal for self-employed people with few or no employees. The contribution limits in 2023 are the least of $66k or up to 25% of net self-employment earnings or contributions. This option has a $330k limit on the compensation that you can use to factor contribution. If you have employees, you are required to contribute an equal percentage of salary for every eligible participant. In other words, if you contribute 20% for yourself, you must do the same for each eligible participant. Similar to the Solo 401(k), SEP IRAs are extremely flexible because you are not required to contribute every year. 

Start an Emergency Savings Fund Today

If you haven't already, it's imperative you have an emergency saving fund. This is key because periodic income disruptions and lumpy streams of income are simply a reality of life for self-employed business owners and contractors. Your emergency savings fund can be a real source of comfort and sustainability to help you weather through whatever storms life may throw at you.

The first goal should be to have emergency savings substantial enough to cover 3 months of skeleton expenses, which are the stripped-down, bare-minimum version. Next, you should move toward having six months and then a year of emergency savings. Your emergency savings serves more of a purpose than to satisfy the here and now. It can help protect and prevent you from tapping into any retirement funds you have already saved once you hit a rough patch.

Contact MB Group to Get the Help You Deserve

Just as you would turn to an attorney for legal expertise, or a doctor if you have a medical problem, it's imperative to work with an experienced financial professional at the MB Group. Our experienced team of CPAs near you can guide you through the process of planning for retirement and help you achieve your goals. We will also help you see each option through the lens of tax implications for today and tomorrow. 

Contact our team today.


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Tags: Retirement

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