TOP TIPS - Retirement Planning for the Self-Employed
A study published by The Pew Charitable Trusts in 2019 revealed that only 13% of self-employed individuals who run a 'one-man-band' type enterprise are enrolled in a retirement plan, compared to almost 75% of traditional employees. Things are hardly better among those involved in multi-person firms; the study found that only 29.9% of this group were currently participating in retirement plans. *
Furthermore, median contributions of self-employed people in a single-person firm have a median of $50,656 saved in defined contribution plans. Whereas the median savings for a self-employed person in a multi-person firm are $186,000. *
And, sadly, it's a relatively common occurrence that self-employed individuals who set up a retirement savings plan then go on to tap into their retirement funds to keep their business afloat.
So, against this background, what should you, as a self-employed person, be doing to save for your retirement?
Make retirement a priority
Although your business might seem like the absolutely priority in your world, in the immortal words of Ira Gershwin, ‘It ain't necessarily so.' Channelling all your money into your business is tempting, but in reality, there is nothing worse than being left short of cashflow in your retirement years. As such, if you are self-employed, now is the time to take independent financial advice so that you can begin planning for your retirement.
Consider the insurance route
If you have reservations about redirecting money away from your business and putting it into a retirement plan, it may be in your interests to utilise Section 7702 of the tax code to buy life insurance.
This is because the money you put into the policy will be liquid and, should you need to withdraw it to put into your business, it will be tax-free. Traditional whole life insurance may be the best route as many policies contain a rider called "paid up additions" which can pay dividends. Under this rider, in the event you suffer ill-health or disability, the insurer should continue to pay your premiums, while the death benefit may be used during your lifetime to pay for care and treatment costs.
Annuities, despite their bad reputation as an investment product, are a kind of glorified insurance policy, and may be another useful tool. For example, fixed indexed annuities are linked to a stock index and, although not growth-focused, can offer the policyholder an income in retirement.
If you earn big, consider the Solo 401(k) Cash Balance Plan
If you earn a good income from your business, and you don't have any employees, a solo 401(k) that is supplemented with a cash balance plan or profit sharing contribution may be a good option for your retirement saving.
You might be making good money now, but situations can and do change, as such if your business experiences a downturn, you will want to be sure that you have put money aside while the going is good – there is no point trading off your retirement simply to enjoy extra prosperity today.
Consider the popular options – SEP IRAs and Solo 401(k)s
Simplified Employee Pension Individual Retirement Arrangements (SEP IRAs) and Solo 401(k)s, may be a good option, depending on whether your business is an S Corp or a Limited Liability Corporation (LLC). By using one of these vehicles and contributing whichever is less out of $57,000 or 25% of your yearly profit, you can, in a few short years, build up a healthy retirement fund.
In the case of a 401(k), the fund is protected by ERISA (the Employee Retirement Income Security Act). This protection is particularly good as it means that the assets are protected even in the event that you or your business face legal action, bankruptcy or any other form of liability.
Blacktower in the United States – for you retirement plans
If you are a foreign national in the US, or you have dual citizenship, you will have some unique cross-border considerations which you must factor into your retirement plans, particularly if you are self-employed.
Our independent financial advisers in the United States can help you plan a clear way forward. For example, we can help with all of the following:
- Defined benefit plans
- SEP IRAs
- Solo 401(k)s
- Life insurance
If you would like to consider your options, contact our retirement planning specialists today.
Disclaimer: The provision of information in this communication is not based on your individual circumstances and does not constitute investment or tax advice. Blacktower makes no recommendation as to the suitability of any of the products or transactions mentioned.
* https://www.pewtrusts.org/en/research-and-analysis/issue-briefs/2019/09/as-the-self-employed-near-retirement-are-they-prepared - Accessed 28-02-20