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When you are working for yourself, you may not have a human resources person or retirement specialist working for the company with which you are employed to help guide you through your retirement options. You may have to rely on yourself.
As a self-employed individual, you have many of the same tax-deferred options as employees who participate in company plans, but there are important differences, too. To maximize your retirement, consider these tips to help you plan for retirement.
Weigh all of your options. You can choose between SEP IRAs, Simple IRAs, and individual 401(k)s to benefit from immediate tax breaks and tax-deferred growth. With these plans, you don’t have to pay taxes until you withdraw your money.
If you decide to invest in a Roth 401(k)—a plan that combines features of a traditional 401(k) with a Roth IRA—you won’t get the immediate benefit of tax breaks, but you can withdraw money in retirement without having to pay taxes.
Budget, budget, budget. You can’t save for retirement if you aren’t willing to put the money aside to do so. Unlike employees, who can automatically have part of their paychecks deposited into an employer-sponsored retirement plan, it’s up to you to set aside the money. Create a budget that allows you to put 15 percent to 20 percent of your annual income toward retirement, and make regular deposits into your retirement account.
Protect your retirement account. There are two things that can drain your retirement account and completely change your retirement plan: death and illness. Consider opening a tax-deductible health savings account (HSA). Your money will grow in the HSA until you have to take it out for qualified expenses, which include approved medical, dental, and vision expenses.
In addition, be sure to set up a long-term care plan. If you or your spouse requires long-term services and you don’t have enough money, or if your insurance company doesn’t offer adequate coverage, you will need to find some way to pay for the care. That puts everything you own up for grabs, including your home and your assets.
(Retirement tips: Planning strategies for new investors)
Understand Social Security. As a self-employed worker, you are still entitled to Social Security benefits because you pay the 15.3 percent Social Security tax. Make sure you don’t try to reduce your net earnings each year to avoid paying a large amount in Social Security tax because this can come back to haunt you later. You will need 40 credits to qualify for Social Security income in retirement, and reducing your earnings now can result in you not earning enough to qualify for benefits down the road.
Take advantage of deductions. Write off your retirement contributions when you file your income taxes. Pay close attention in order to maximize contribution levels, and discuss your options with a qualified tax professional.
The information contained in this blog post is designed to generally educate and inform visitors to the Equifax Finance Blog. The blog posts do not give, and should not be assumed to provide, personalized tax, investment, real estate, legal, retirement, credit, personal financial, or other professional advice. Before making any financial decision, you should always consult with the appropriate professionals who can explain your options, rights, and legal responsibilities, and advise you on any tax, legal, credit, or business implications that may result from those decisions. The views and opinions expressed by the authors of blog posts are their own views and may not be the views or opinions of Equifax, Inc. and/or its affiliates.
Equifax maintains this interactive forum for education and information purposes in order to allow individuals to share their relevant knowledge and opinions with other members and visitors. We encourage you to participate in discussions about personal finance issues and other topics of interest to this community, but please read our commenting guidelines first. Equifax reserves the right to monitor postings to the forum and comments will be published at our discretion. Do you have questions or comments about your Equifax credit report or customer-service issues regarding an Equifax product? If so, please contact Equifax directly. All opinions and information expressed or shared in blog comments are solely those of the person submitting the comments, and don't necessarily represent the views of Equifax or its management.