Whilst being your own boss no doubt has its merits, being self-employed can also create problems.
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Specifically, a self-employed individual has to take much greater control when it comes to their pension.
In the second article concerning self-employed worker pensions, an in depth look it taken at the wide variety of options available in the USA.
Retiring in America
The advantages of building up a pension in America are vast, and include automatic savings, tax deferral of your gains, tax deductions for your fund, and importantly the knowledge you can pass on tax-deferred assets to your loved ones.
Unless you have highly complicated needs, retirement plans can be extremely good value, and a single-participant plan is easy to create, inexpensive to maintain and simple to manage.
Every major brokerage has a full range of pre-approved plans (i.e. IRS-approved, so the hassle of filing for a “determination” letter is not required) that you can utilise.
Types of pensions
The variety includes the 401(k), Roth 401(k), IRA, Simple IRA, Roth IRA, SEP-IRA, money purchase pension plan, simplified employee pension, profit sharing, and defined benefit plan.
Knowing which to select will depend on your individual circumstances. By researching the plans, you can learn which options best suit your needs – e.g. whether you need the flexibility to pay in different levels of income each year, and perhaps whether you need to take a loan from your plan.
Two of the most popular options for the self-employed are the simplified employee pensions (SEP) and solo 401(k).
Contributions to both are tax-deductible, and both will grow tax-deferred until you begin your retirement.
The maximum contribution with a SEP is USD 51,000 for 2013. However, there is an upper limit – namely 20% of your net income.
SEPs are easy to set up at banks, brokerage firms and mutual fund companies, and usually offer a wide range of investment classes. You cannot however take out a loan from an SEP.
In a solo 401(k), you can contribute up to USD 17,500 plus up to 20% of your net income – so up to USD 51,000 total.
In addition, some solo 401(k) plans allow you to take out loans.
Another good way to determine the most optimum plan for your needs is to work out how much you’ll be able to save each year – then pick the least burdensome plan that permits that level of savings.
For an in-depth review of your situation, the benefits of seeking regulated, independent advice from a financial advisor as well cannot be underestimated. They can both highlight any considerations you might have overlooked, and supply you with the most favourable options for your needs.
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Below is a list of some related articles, guides and insights that you may find of interest.
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