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What Self-Employed Entrepreneurs Don't Know About Retirement

Being the “boss” is pretty great. There's nothing like watching your idea come to life in the form of your own business. Business owners tend to run into the same problem though; they are all so focused on growth, most of the time retirement planning becomes a distant afterthought. This is not a good practice and it will come back to haunt you! Let's take a quick look into that and get some options on the table to make sure you're not left holding an empty bag later in life.

Think of it this way -- retirement plan contributions are required for many companies and state retirement programs...it's a bill essentially. Those employers have made retirement planning a non-negotiable budget item. Why don't self-employed entrepreneurs treat it the same way? They don't have to. It's not forced, and therefore that money is up for grabs and guess what? If it's not a bill, gets spent! You wouldn't dream of not paying your cell phone bill or your electric bill, right? Why then, would you ever dream of not paying yourself, or rather, your future self? Many business owners don’t consider this thought in the beginning, as they are focused on making a profit. Years can quickly fly by, and when it’s time to retire, there is nothing there.

If we are going to plan properly for retirement, fortunately there are many great ways to do so and maximize the tax advantages available to business owners and self-employed entrepreneurs. These options will help you select the type of account that would work best. Here are a few options:


A traditional or Roth IRA is good for individuals who are saving less than or up to $5,500 a year, up to $6,500 if you're over age 50. You do not have to be self-employed to have an IRA or Roth IRA. There are advantages to both – you will have tax deductions on a traditional IRA that you won’t have to worry about after retirement. With a Roth, there is no immediate deduction and withdrawals after you retire are tax-free. There are limits on how much you can earn when having a Roth IRA so make sure you check with your advisor to make sure you're within the limit. There can also be early withdrawal penalties on IRA's if you take from the account before age 59½, so know the rules before you play.


I'm a big fan of SEP IRA. This option works for those self-employed with only a few employees, or a solo entrepreneur. The contributions for this in 2018 is up to 25 percent of compensation, up to $55,000. There is a $275,000 limit on compensation for the sake of this calculation. Employers must contribute an equal percentage of salary for each employee, and you will also be counted as an employee. So, whatever you put away for yourself, you also have to put away an equal percentage for employees. As an employer, you CAN institute a years of service requirement though, so there's some flexibility there as well. 

Solo 401(k)

This one can also be good for self-employed people who have no employees. You can contribute up to $55,000 this year, and if you’re over 50, you have an additional $6,000 you can add as a “catch-up” contribution. There are some favorable variables to help with your contributions, including the special rule for single-member LLCs and sole proprietors: You can contribute 25 percent of net self-employment income. This works just like a standard 401(k), so if you've had one before, you're probably somewhat familiar with how they work. Just like a traditional IRA, contributions are made pre-tax and any distributions after age 59½ are taxed.

Defined Benefit Plan

These kinds of plans work well for those self-employed individuals who have no employees and a high income. It's a more long-range solution nowadays, but defined benefit plans used to be THE retirement plan back decades ago. The contribution will be based on how much you will be receiving once you retire, your age, and the expected return on your investments. Contributions are tax deductible for the business in most cases, and the distributions during retirement will be taxed as income.

Simple IRA

This retirement option is tailored for business owners who have up to 100 employees. The business owner and any employees can contribute up to $12,500 from their compensation, with a catch-up contribution of $3,000 if you are over the age of 50. If contributing to another plan, your contributions cannot exceed $18,500. The contributions are deductible, but any distributions during retirement is taxed. Any contributions you make to an employee account is also deductible as a business expense.

Putting together a solid retirement plan is just as important as having a successful business. By planning for your retirement, it helps entrepreneurs develop a long-term wealth mindset and good savings habits. Even if it’s a few dollars a month, putting something away for retirement is always better than having nothing at all!

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About the author: Kyle A. Davis is a Chartered Financial Consultant® and president of Integrity Financial Group in Orlando, FL. He is a Florida native and an advocate for financial literacy and practical money education. When not assisting clients in planning for retirement, he creates educational videos on financial wellness on his YouTube Channel - https://www.youtube.com/user/financialplannerinfl

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