Introduction to Retirement Options for Self Employed

Being self employed does not allow you to save for retirement as easily as if you worked for someone else.  When you work for someone else they take the responsibility of figuring out the best retirement accounts and taking care of setting them up.  Instead when you work for yourself you need to sort through all the self employed options and decide what is best for you and your company.

This can seem overwhelming; there are so many choices ranging from a traditional pension, to solo 401K, SEP’s and more.  How are you supposed to know what is right for you and your business?

Before you jump into picking out the right retirement account you need to do some information gathering and soul searching.  Following are some questions you need to answer to help you choose the right retirement account.

Know Your Retirement Goals

There is no point in stressing over what account to open if you don’t know what you are trying to achieve.  The following questions will give you a better idea of what you need for your retirement savings:

  • When do you want to retire – are you looking to retire in 5, 10, 15, 20 years?
  • What do you want to do in retirement – are you planning on continuing to do some work, travel, spend time with family, golf or volunteer?  What you are planning on doing will impact how much you need to be saving today.
  • How much will you need for retirement – while you won’t know exactly what you might needs as life is unpredictable, you can narrow in on a number that will allow you to live comfortably.  (Click the link above for a post I wrote on how to figure it out).

Max Out Other Retirement Accounts First

Before opening a retirement account for your small business you should first focus on maximizing other retirement accounts.  I recommend this in order to minimize the extra costs associated with workplace retirement accounts and for simplicity.  The fewer accounts you have to track the simpler your life is.

This means utilize Traditional IRA or Roth IRA’s and if you have a spouse with a 401K maximize what goes into their account.  You may find that using these two approaches will get you to the amount you need to save for retirement.

If not keep going with the following questions!

Gather as Much Information on Your Business as Possible

Determining what the right retirement account is takes more than understanding how a SIMPLE is different from a SEP.  You need to understand your business now and understand where your business is headed in the future.  The following questions will help you to prepare for making the final decision.

  • How consistent is your business income?  Is it different every month?  Is it seasonal?  Can you contribute to a work place retirement account every year or are you looking for something to use when there is extra money to be had?
  • What are your growth plans for your business?  Are you planning on hiring employees?  If so how many?  If so are they going to salaried or part time hourly?  How many hours are these employees going to work?
  • Is your current salary level for yourself going to remain close to the same or is it going to grow?  Is your salary predictable and on a W-2 or do you take draws when you have extra money in the business account?

Learn About Retirement Accounts & Review Options with CPA

Now that you know what you are in need of and understand where you want your business to go you can begin to focus on the actual accounts that you can open.  Your options are 401K, SEP, SIMPLE, Keogh and traditional pension plans.  (Because of the amount of information in each of these I will cover them in separate posts.  If you need help before I have these done please check out this book: 100% Deductible: Tax-Advantaged Business Retirement Plans *)

Once you understand a bit about each of the options you will want to sit down with your CPA.  With your CPA you will review how much you would be able to put in each account and at the same time talk about any other issues that would be specific to you and your business.  Remember to take with you all the information that you have pulled together from the above steps, as this information will help you determine if an account is right for the long term.

Choose an Account and Open

Now you should have the right retirement account picked out for you and are ready to open it.  Search online for brokerage companies that offer the plan that you are looking for.  Ask your CPA and other business owners for referrals.  Review the fine print and understand what fees you are being charged, what fees your employees are being charged and what services you get from the company to help with management.  Based on the research you do select the best company and begin investing today.

The best way to have a secure and happy retirement is to save for it, so don’t let the confusion of retirement accounts stop you from investing.  Begin today and you will be happy you did!

*Affiliate Link

Roger @ The Chicago Financial Planner says December 5, 2012

As usual a great guide for your readers.

    Andrea says December 6, 2012

    Thank you!

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