Nothing beats the joy of being your own boss! Due to various circumstances you can choose to become a solopreneur or an independent contractor or a freelancer. Being a self employed person, you can schedule your own working hours. You can follow your own terms to reach a successful goal. On the other hand, you can play with your retirement strategies. However, you may face many hurdles too. You need to take many responsibilities like, health insurance coverage,tax for both you and employees. Retirement planning is one of the most important things to do. Start thinking about your retirement plan if you are considering becoming self employed.
Eligibility to become a self employed person
Doing a business is first and foremost condition to be considered as a self employed. IRS specify a self wage earner as:
- An independant contractor.
- A freelancer (Entrepreneurs with no employees)
- A member and a partner in a business.
- Part time worker in a business.
Set up a retirement plan: Choose the right plan
Sometimes working under a boss makes life easy as you needn't think about health care coverage, medical leaves, paid vacation leaves. you'll get a carefree life as well. Apart from these, as a self employed person planning for retirement life is very vital thing. First of all you need to set up a retirement plan. Be very careful before going for a retirement plan. Make sure the plan should reach your demand. There are many features of retirement plans accessible to you. Below are some questions you should ask before dealing with a retirement plan.
- Ask the deadline of the plan
- Ask the costs of the plan
- Ask about tax profit
- Ask About the contribution flexibilities
There are plenty of IRS approved plans for you. However, IRS is little bit complicated to understand. So study well before planning for a retirement plan which is best suited for your business.
Following are some financial guidelines for self employed persons for their retirement.
- Solo 401(k)s for sole proprietor (Entrepreneurs with no employees)
This plan is also known as one participant 401(K). The solo 401(k) is best for those entrepreneur who has no employee other than a spouse. Solo 401(k) is really appreciable for a spouse team business owner. 401(K) plan allows to contribute up to $16,500 plus of your whole income from the business. There are many terms related to this plan. You should file a special tax return for the plan if your account cross $250,000 or above. It is said that, SEP IRA requires less cost than 401(K) to continue. It allows up to 25 percent extra contribution as it works as both employer and employee. On the other hand, solo 401(K) allows contribution up to $49,000, if the spouse works for a self employed company. Using a calculator can make it easy to understand about the contribution based on your income.
- Keogh plan (Defined benefit, defined contribution):Defined benefit and defined contribution are two types of keogh plan for self employed person in United States. This plan is similar to pension plan. It starts at the time of your retirement and continues for the rest of life. Contribution is mandatory for this plan as it provides you a specific amount of money monthly or yearly. This plan is best for you, if you are making a huge money and planning for a big contribution. It requires 20% of your income. It is very useful for giving incentives to your employees and make them happy in your company. Moreover, it required more administrative guidance. So, consult to a pension specialist or financial planner to understand it better.
- SEP IRA (simplified employee pension):This is the most flexible and easy retirement plan for self employed persons. SEP IRS is applicable both for one person business and for your employees. The plan allows you to contribute (as per your choice and when you feel like) less than the maximum. This plan is best for high income business owner. It is very easy to maintain the rate. You can manage the rate from banks and mutual funds. So you are free from worry related to the business ups and down.
- SIMPLE (savings incentive match plan for employees): This retirement plan is for a freelancer or who make money from consulting. This plan is less attractive than other plan because both employer and employee have to make a contribution from their salary. It requires yearly $11,500 and 3% of income.
Your commitment to debt free retirement
When you are a self employed person, retirement depends up to you. But your retirement will be a fun filled span when you stay debt free. So, start saving for retirement as early as possible. Your determination have that power to get a peaceful retired life.
Following are some strategies to stay out of debt so that, you can enjoy a tension free retirement life with your spouse.
- Today's plan to secure your tomorrow: Do not ignore your big expenses in near future like hospital bills, medicare etc. Go for an insurance policy to prevent such emergencies. An insurance policy can minimize the blow to your finances. An insurance policy will help you get an idea about the expenses for any illness. So you can go for a suitable policy and can claim money in future for an emergency.
- Live a frugal life with fun: According to Rodgers CBN news, here is the secret to becoming financially independent - spend less than what you make. It's never how much money that you make. And if you're still thinking, If I just made more money, it would solve my financial problems, 'you are on the wrong track.' There a possibility that you'll make huge money from your self business. But if you start living your life by your means, you can save more money for your retirement. Try to keep your monthly expenses small .There are many ways to live frugally. Before its too late, be a frugal saver. Moving out with a big car with a burden of debt is not a wise decision. Try to focus on paying off debt, emergency fund, pay off your credit card bills instead of enjoying a lavish life.
- Pay off your debt: If you're thinking about retirement with the burden of credit card debt, then go for a debt management plan. This plan will help you reduce the interest rate. You can easily make a monthly payment to manage your debt.
Do not take money from your 401(K) to pay off debts. In that case, you may struggle to put back that same amount of money into it for a long time. Moreover, you may face 10% tax penalty for early withdrawal. Contribute more money for a long time. So you can get more money at the time of retirement. Contributing money on 401K is very important. Try to find out an easy plan which can reduce your debt level very quick. Try to pay off student debt with the help of your children, Teach them to take responsibility to pay off their own loans.
- Work few more years to get some extra income: Think early about all the costs like food costs, gas for your cars, medical issues, household expenses. Work for some more time to make extra money if you think it will be unmanageable to manage all the costs at the time of retirement. Continue with your work unless or until all the debts are repaid. Enjoy your retirement without any nightmare of debt. There are ups and down in economy. So, try to reduce debt as early as possible and get a control over your finance. Once you pay off all your debts, you'll able to save the money paid as interest on them. So,working for a long period is going to be a healthy option for you!
Read more: 5 Types of debt to scrap before you retire
Retirement saving plan for 40s or 50s (Late starters)
Are you one of them who started saving for retirement recently? There are several ways to save money incase you're too late. Even at the age of 50s you have enough time to save money for your retirement. So think slowly about the total money you'll need at the time of retirement and move forward. You can find out good calculators available online to sum up the estimate for your retirement savings. Talk to your spouse about the lifestyle of yours. If you stay at a costly place, then try to move in to a less costly place.
If you have student loans of your kids, reduce those as early as possible. Plan to move to a small home instead of living in a big house. Set up a financial goal and save money according to your plan.Thus you can save a lot for your retirement even at 45 or 50 of your age. If you are at the age of 45 , you have 21 years to make money for retirement, so take calculative steps instead of worrying about your future.
Being a self employed person, you may face many ups and downs at your work. Besides all the circumstances, you can save money for retirement and spend too. So, live happily dreaming of a peaceful retirement.