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Retirement Planning for the Self-Employed

by Chris Poindexter

I discovered a long time ago that the best way to like the boss… is to be the boss. Being the boss eliminates a lot of the fear that goes along with traditional employment. Layoffs are a thing of the past, job loss becomes something for other people to worry about. You’ll never be the victim of age discrimination, something all too common in technical fields.

There are some downsides to being independent, some of which can be significant. For one you have to be constantly self-motivated; there’s no one setting your schedule or performance goals for you. Another reality some people find difficult is that if you don’t work, you don’t get paid. That’s a concept my doctor seems to find difficult to grasp, as he tells me to take three weeks off. That may be easy for him to suggest, but not so easy to do for the self-employed.

There are no holidays; weekend days are frequently work days; and there are none of the benefits that come along with a 9-to-5 day job, like a 401(k) plan with an employer match. Because you’re in a layoff-proof job not subject to age discrimination, it’s sometimes easy to forget about retirement planning when you’re independent. If you’re neglecting retirement planning as a sole proprietor, you’re missing out on some really great deals the IRS makes available to the self-employed. Many of these deals are really sweet if you’re the sole proprietor, but do be aware some of these deals change the minute you hire your first employee.

You’re Not Alone

TD Ameritrade survey found that 40% of self-employed individuals were not saving regularly for retirement, and 28% weren’t saving anything at all. Those numbers are somewhat alarming, considering the ranks of the self-employed expanded by 14% between 2001 and 2012.

Financial Priorities

Sole proprietors might feel cash is tight, and any extra should go right back into the business. By skipping retirement savings, small business owners are missing out on tax-free compounding.


A SEP IRA lets you stash as much as 25% of your income, up to $52,000 in 2014. A SEP is a great deal for a sole-proprietor, but it gets expensive if you end up hiring employees.

One Participant 401(k)

This is another one that gets expensive if you hire employees, but is a sweet deal for sole proprietors. Also known as an individual 401(k), it lets you put away money as both an employee and an employer. You can defer up to $17,500 as an employee ($23,000 if you’re over 50 and trying to catch up), and up to 25% of your income. The total for both can’t exceed $52,000. Again, if you hire employees, you either have to convert to a less attractive option, or stop funding it altogether.

Automate Your Contributions

The easiest way to start saving for retirement is to automate your contributions. Talk to your financial advisor to make sure you’re picking the right retirement account for both your current and future business. Many people start out as a sole proprietors, but quickly grow to the point where they need employees. Part of your retirement planning is planning for success.

If contributions are regular and automatic, you’ll be amazed how fast your nest egg builds up over time. You don’t have to contribute a lot, but contribute something every month you can. This is one time the IRS skewed the rules in your favor; take advantage of it.

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