Being self-employed has many advantages, such as having more autonomy. But being in charge also means more responsibility for business finances and, in some cases, entrepreneurs neglect their own personal planning. Many entrepreneurs will not save enough for the future unless they make retirement savings a priority.
A recent TD Ameritrade survey found that 40% of self-employed people are not saving for retirement on a regular basis and 28% do not save at all. Further, the survey found that significant numbers of younger entrepreneurs fail to save: 29% of Gen X and 32% of Gen Y report not saving for retirement.
Meanwhile, entrepreneurship is rising. Since 2001, the number of self-employed positions has increased 14%, according to Economic Modeling Specialists International, a subsidiary of CareerBuilder. Today, there are some 10 million self-employed people in the United States.
And the ranks of the self-employed continue to rise. With the fallout from the Great Recession and anemic job recovery, many unemployed individuals have given up searching for work and are starting their own business. In fact, by 2020, 40% of the workforce will be composed of freelance workers, according to business software and solution provider Intuit.
A growing opportunity for financial advisors exists to provide retirement planning advice to sole proprietors and small business owners.
SEP IRA deadline approaching
A popular savings vehicle that can be used by a sole proprietor or a small business owner is the Simplified Employee Pension, SEP IRA. With an April 15 deadline for funding and contributing to a SEP IRA for the 2013 tax year, it is a good time to reach out to clients who may benefit.
A one-participant or solo 401(k) is another savings option to cover the sole proprietor without any employees, and his or her spouse. The plan has the same rules as any other 401(k) plan.
With an individual 401(k), the business owner can contribute as the employee and the employer. The business owner can make elective deferrals of compensation up to the annual contribution limit of $17,500 or $23,000 if age 50 or older. The owner may also make non-elective contributions up to 25% of total compensation. Total contributions to the account — not counting catch-up contributions for those 50 and older — may not exceed $51,000 for 2013 and $52,000 for 2014.
The SIMPLE (Savings Incentive Match Plan for Employees) IRA was designed for small-business owners, with 100 employees or less, who are not currently sponsoring a retirement plan. The plan allows both employers and employees to make tax-advantaged contributions.
Employers can make tax-deductible contributions and employees can make pretax contributions. Employers may choose between making an incentive match of up to 3% of compensation or a 2% non-elective contribution for each eligible employee from year to year.
As with any retirement planning strategies, individuals should meet with their financial advisor and a tax expert to determine strategies that would work best for their individual situation.