When you are self-employed, you lose any possibility of a matching contribution that many employers would offer.
Often times, self-employed individuals are busy managing employees, figuring out profits and in general, overseeing the entire business. It’s easy for something like saving for retirement to slip through the cracks, especially since there are many IRS rules and formulas to figure out.
As most people know, saving for retirement is a must, and the only thing that you need to grow your money is time. That means you should start saving now, especially since there’s a retirement option tailored to the self-employed, called a SEP-IRA, which is explained in detail below.
What is a SEP-IRA?
If you’ve been procrastinating when it comes to saving saving and are a self-employed individual who reports business earnings to the IRS on Schedule C, consider opening a SEP-IRA, or Simplified Employee Pension Individual Retirement Arrangement.
This type of account is a variation of the Individual Retirement Account. SEP-IRAs are adopted by business owners to provide retirement benefits for the business owners and their employees. An SEP plan allows for employers to contribute to traditional IRAs but allows the flexibility to change the amount from year to year. These plans are easy to set up and maintain, and have low administrative costs.
There are generally no filing requirements and SEP IRAs are tax-deferred. Taxes will only be paid upon withdrawals or on a particular date set prior to opening the account.
One of the down-falls is that employers are the only possible contributors to the accounts. The biggest caveat is that you must make the same percentage of contributions for all covered employees, who are at least 21 and have been employed by you for at least three of the last 5 years and earned at least $550 from you in the previous year. (You can’t count your spouse as a covered employee.) You can deduct up to an additional $51,000 for contributions you make to employee accounts as well.
According to tax-prep software giant TurboTax, contributions for retirement plans are the number one tax deduction for self-employed business owners, so it’s time to get started on choosing a retirement account!