Best Retirement Plans For Small Business Owners


Best Retirement Plans For Small Business Owners – Rembrandt, Vermeer and Van Gogh died in poverty, but with a little financial planning, you don’t have to.

Most of us know nothing about retirement. It’s rarely taught in school, and when we hear about retirement options, it’s always aimed at married couples with 9-5s and 401 miles. If you’re a self-employed artist, having an employer give you a 401k or 403b probably isn’t an option for you, but that doesn’t mean you can’t still plan for your retirement.

Best Retirement Plans For Small Business Owners

You can always keep your money in a bank savings account, but according to the FDIC, the national average interest rate on savings accounts is currently 0.05% APY, which means your money is barely keeping up with inflation. Opening a retirement account is a great way for artists or any small business owner to plan for their future.

Useful Retirement Strategies For Small Business Owners

As a self-employed person without an employer retirement plan, your options are Roth IRA, Traditional IRA, SEP IRA, Solo 401k and HSA. Some of these are additionally available to you even if you have a 401k or 403b.

Let’s take a look at what the options are so you can choose the one that’s right for you.

An individual pension account is a personal account that is not linked to an employer. A Roth IRA is not an investment in itself, but an account through which you can buy investments. Most Roth IRAs give you access to a wide range of investment options, including individual stocks, bonds and mutual funds. The investments you choose should be based on your risk tolerance and age.

A Roth IRA is good because you pay taxes on what you put in. If you’re in a lower tax bracket now and think you’ll make more money in the future, a Roth IRA is a great option because you pay lower taxes on your contributions now, but you don’t have to pay taxes on your contributions. Contributions. Income if you withdraw the money years later.

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A Roth IRA is the best deal for young investors and has significant tax advantages over time. There are many great places to open a Roth IRA such as Fidelity, M1 Finance, Vanguard or Betterment because they have many quality, low-cost investment options (I personally chose Fidelity for the customer service I needed when I was studying). It is not necessary, but you can choose the same place where you also open a brokerage account for investment. But apps like Personal Capital are great for managing your money, even if you have accounts in different places.

Another benefit of a Roth IRA is that you can withdraw your contributions (investment money, not income) at any time without paying taxes or penalties. This will negatively affect your income in the long run, so it’s not recommended, but good to know in case of an emergency! If you are 59.5 years old, you will receive a refund of income tax and penalties. Also, the account must be at least 5 years old by then. As of 2021, the maximum for a Roth IRA is $6,000 ($7,000 if you’re 50 or older), so you should try to contribute every year.

Roth IRAs have historically provided average annual returns of 7-10%. So if you contribute $6,000 a year starting at age 25, you could end up with about $1,146,940.00 by age 60 if the income can be accumulated without taxes or penalties. That translates to about $38,231 a year in retirement if you live to age 90.

Roth IRAs come with some notable exceptions that you may want to know about. If you are younger than 59½ and have owned a Roth IRA for less than five years, you can still withdraw some of your earnings under certain circumstances. They are as follows:

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Excludes unreimbursed medical expenses that exceed 7.5% of your adjusted gross income for the year.

You choose to make essentially equal payments, which basically prevents you from receiving at least one distribution per year for at least five years or until age 59½, whichever is later.

There is generally an income tax and a 10% penalty when you withdraw income from your account, but if you withdraw with one of the exceptions above, you can avoid the penalty but not the income tax.

If you are younger than 59½ and have owned a Roth IRA for 5 years or more, you can avoid taxes and penalties on earnings withdrawn from your account if you qualify for one of the following exceptions:

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A traditional IRA is taxed when the money is withdrawn, unlike a Roth IRA where the money is taxed. It’s also good to know that contributions to a traditional IRA are tax deductible, unless you’re covered by another retirement plan. A traditional IRA can be a good option if you think you will be in a lower tax bracket (earning less money) than you are now when you retire. You can start withdrawing money from your traditional IRA as early as age 59 ½, with withdrawals subject to ordinary income tax.

Whether you participate in a traditional IRA or a Roth IRA, you can contribute up to $6,000 per year, or $7,000 if you’re 50 or older, to one or both—never exceeding the annual maximum. They count together, so you can’t exceed both by $6,000 a year, but you can put $3,000 into each if you want.

The biggest difference between a Roth IRA and a traditional IRA is how and when you get the tax break. Contributions to a traditional IRA are taxable, but withdrawals are taxable. Roth IRA contributions are not tax deductible, but retirement contributions are tax free. Do you think your tax rate will be higher or lower in the future? If you can answer this question definitively, you can theoretically choose the type of IRA that will give you the biggest tax savings: If you expect to be in a higher tax bracket in retirement, you can choose a Roth IRA and be tax-deferred. . Benefits. If you expect lower retirement rates, a traditional IRA and its pre-tax benefits may be better.

If you think a Roth or Traditional IRA is right for you, one option is to invest in a target date retirement fund. They are offered almost anywhere you want to open an account. A target-date fund will naturally adjust your investment allocation between stocks and bonds as you approach retirement, so you don’t have to do much other than invest! Another option is to invest your IRA in low-cost index funds that have low fees over the long term, but a target-date fund is a good place to start if you’re new to investing or just don’t want to worry. what. It is difficult to say.

Types Of Retirement Plans: Which Is Best For You?

SEP-IRAS are primarily used by small business owners who want to help their employees in retirement, but freelancers and self-employed people can also take advantage of this option. If you are a registered business owner and have more than the $6,000 contribution limit, a Simplified Employee Retirement IRA (SEP IRA) is a traditional IRA for self-employed and small business owners. This is a retirement account that offers tax benefits to business owners and self-employed individuals who are saving for the future. If you have self-employment income, a SEP IRA allows you to save more for retirement than a traditional IRA or Roth. With a SEP IRA, you can contribute up to $58,000 in 2021, although annual contributions cannot exceed 25% of compensation. You can combine a SEP IRA with a traditional or Roth IRA.

In general, SEP IRAs are best for self-employed individuals or small business owners with few or no employees because the IRS requires that you contribute an equal percentage of your retirement benefits to your employees.

Contributions are taxable, meaning they reduce your taxable income and investments grow until retirement when withdrawals are taxed as income.

Note that to qualify, you must be self-employed, a business owner in a partnership, limited liability company, S corporation or C corporation, or earn income as a self-employed person.

Self Employed Retirement Plan Options

A solo 401(k) is an individual 401(k) designed for a business owner with no employees. If you have full-time employees, you cannot contribute to a solo 401(k), although you can use the plan to cover both you and your spouse. There are no age or income restrictions, and you can contribute up to $58,000 in 2021, with an additional $6,500 withheld if you’re over 50.

In this type of retirement, you have to think of yourself as an employee and an employee. Your contributions are valid within the total contribution limit

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