Retiring Well When You're Self-Employed

You’re a driver of the economy – a true American entrepreneur – and whether you have a team supporting you, or you are the whole team, it can seem like a challenge to make sure you are saving enough for retirement. If you’re like many of our clients, you’re probably constantly putting money back toward growing and reinvesting in your business. But what about your own future? Fortunately, the freedom of being your own boss also offers you several options to choose from in terms of your own retirement. It all comes down to how much you need to save, how close you are to retirement, and what your goals for retirement are.

1.      Solo 401(k) (Sometimes called “Uni-k” or “Solo-k”)

With a solo 401(k), for IRS purposes, you are considered both an employer and employee, and therefore, can contribute in both capacities. Your elective deferrals (meaning the part taken from your salary, pre-tax), can be up to $18,000/year. Total contributions for those under 50 years of age is $54,000 in 2017 and if you are 50 and older, $60,000. There is also a ROTH version of the Solo 401(k), but certain restrictions apply.  Many people find that using some combination of the ROTH Solo 401(k) and Traditional Solo 401(k) makes the most sense. It all depends on your specific situation.

2.      Simplified Employee Pension Plans (SEP)

Another option is the SEP, which you can use as a sole proprietor. The SEP can offer you some flexibility in that you don’t have to contribute the same amount each month or year. However, keep in mind that contributions cannot exceed the lesser of either 25% of your total compensation or $54,000 in 2017 and up to $60,000 if you are age 50 or older under certain circumstances.

3.      Safe Harbor 401(k)/Profit Sharing with Cash Balance

Do you want to put away and even tax deduct retirement contribution of between $100,000 and $400,000, or even more per year for your retirement? While this option is by far the most complicated on the list, it also comes with the largest flexibility – and the highest contribution levels. To use this strategy, owners usually start by establishing a 401(k)/Profit Sharing plan with Safe Harbor provisions for employees and then add a Cash Balance Plan. These plans are usually designed to allow the maximum contributions for the business owners and executives while meeting some minimum mandatory contributions for every eligible employee. Third Party Administrators (TPAs) are involved with these plans to perform actuarial testing to pass certain IRS nondiscrimination and other compliance testing.  This is a strategy that allows business owners to increase their net worth, minimize taxes, and put a lot of money away for retirement.

4.      Traditional IRAs and ROTH IRAs

The traditional IRA is a tax-deferred account where you will need to choose the type of investment you want in the account (i.e. stocks, bonds, mutual funds, CDs, etc. )  based on many factors, including your risk tolerance, time horizon, and retirement savings goals. Because contributions are usually made on a pre-tax basis and grow tax deferred, distributions will be taxed when you begin taking them. The ROTH IRA is similar in investment structure, but allows you to make after-tax contributions. The growth is also tax deferred, and distributions will be tax-free! When you’re considering choosing between the two, it’s usually wise to consider if you’re going to retire into a higher or lower tax bracket. If you think you’ll retire into a lower tax bracket, it makes sense to choose the traditional option, as your money will be taxed at a lower rate when you begin to take distributions. If you think you’ll retire into a higher tax bracket, it makes sense to “lock-in” your current, lower tax rate with the ROTH. Both are limited to contributions of $5,500 a year if you are under 50, and $6,500/year if you are 50 or older.

5.      Alternatives

There are many other tools out there that can serve as excellent saving and retirement vehicles that aren’t necessarily “retirement investments” per se. For example, you may decide to use part of your portfolio to help fund your retirement. Tools like Real Estate Investments Trusts (REITS), private equity opportunities, private investments, and other opportunities can be excellent ways to provide steady income streams. There are also many life insurance policies that can be structured in such a way as to provide steady retirement income. In fact, we recommend that you don’t count on any one tool, but plan to use several to ensure that you will have several diverse streams of income.

As a business owner himself for 24 years now, our Founder and President, Jim Lineweaver, CFP®, AIF®, is well-acquainted with the many opportunities available when dealing with retirement for the self-employed. He works hard to offer his clients the same financial, tax, estate, and insurance planning that he uses for himself and his own companies. We hope you’ll give Jim a call today to discuss your situation. A first meeting never comes with any obligation. We simply believe that the best way to help you achieve your goals is by beginning a conversation. Call us today at (216) 520-1711 or email us at Or, simply click here.

Certified Financial Planner Board of Standards Inc. owns the certification marks CFP®, CERTIFIED FINANCIAL PLANNER™, CFP® (with plaque design) and CFP® (with flame design) in the U.S., which it awards to individuals who successfully complete CFP Board's initial and ongoing certification requirements.

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Posted by Lineweaver Financial Group in Retiring, Self Employed, Business Owners


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