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  • Writer's pictureAntonise De Wet

How to save for retirement when running your own business.

Everyone needs to start a retirement fund.

You're in luck if you work for an organization that provides retirement savings. You enroll (or you might be automatically enrolled), and you then make contributions using your paycheck. There is nothing you need to do.

However, as a self-employed businessperson, you must devise your own strategy.

There are many advantages to working for yourself, such as setting your own hours and working from home. However, one benefit of working for an employer that you might miss is having a workplace retirement plan. Thankfully, it is possible to prepare for a secure retirement even if you do not have a 9 to 5 job. You can begin saving for retirement if you're self-employed with a SEP-IRA, SIMPLE IRA, traditional or Roth IRA, or a one-person 401(k) plan. According to the Bureau of Labor Statistics, there were 16 million self-employed Americans as of July. However, this number rises to about 30% of the workforce when you include both self-employed Americans and those who work for them.

Definition of a Self-Employed 401(k) Plan?

A self-employed 401(k) plan is a retirement plan for proprietors of small businesses who work solely for themselves (aside from their spouse). The proprietor of a small business may provide benefits to both the employer and the employee. Sole proprietors and their spouses can set up a self-employed 401(k) as a traditional 401(k) to save for retirement. Business owners don't have an employer with a defined pension plan, retirement fund, or plan to contribute to and take with them because they work for themselves.

The self-employed 401(k) operates similarly to a standard 401 in many ways (k). Contributions are made by participants from pre-tax income, and those savings can be put into a variety of investments to grow tax-deferred until they are withdrawn in retirement.

The self-employed 401(k) does, however, have a significant distinction. Participants can contribute more annually than they could under a traditional 401(k), IRA, or other small business retirement account because they are acting as both an employer and an employee. The self-employed 401(k) is a tempting option for business owners who meet the plan's requirements and desire a significantly higher savings potential due to those high contribution limits and relatively simple plan administration. Small business owners who run their operations alone can make contributions to a retirement plan as both an employer and an employee thanks to self-employed 401(k)s. The two contributions are therefore made by the same individual.

Employer non-elective deferrals and elective deferrals are the two types of contributions made to 401(k) plans. Employees can defer 100% of their pay through elective deductions, up to an annual cap of $19,500 for 2021 and $20,500 for 2022. 2 (These restrictions are frequently changed to reflect increases in the cost of living.)

If the employee is 50 years of age or older, they are eligible to make catch-up contributions worth an additional $6,500 annually (totaling $26,000 and $27,000 annually for 2021 and 2022). Non-elective deferrals are employer contributions that can only be up to 25% of compensation following deductions determined using Internal Revenue Service tables and worksheets (IRS).

Think of taxes

Naturally, not saving for retirement results in paying more taxes than necessary.

According to Chad Parks, founder and CEO of San Francisco-based retirement plan provider Ubiquity Retirement and Savings, "the government has encouraged saving."Imagine a person who pays about 30% of their salary in taxes, and you can quickly calculate how this works, according to Parks.

If this person can save $1,000 per month, $300 of that will replace the money that would have been lost to taxes, according to Parks. Only $700 must be spent out of pocket in order to save $1,000, he claimed. "The government match," I say.

Do I Require a Solo 401(k) Plan?

Solo 401(k) plans are very efficient ways for sole proprietorship businesses to save and grow a sizable sum of money for retirement. A solo 401(k) is a great way to save for retirement if you own a small business and don't already have one set up.

During the course of your company's existence, if you find that you need to hire staff, make sure to update the plan to include them equally or establish criteria to identify benefit-eligible employees and develop retirement plans for them.


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