Retirement Begins With Your First Job!
Many people believe that social security will be around many years from now. The sad facts are that unless Congress makes some major decisions on how to overhaul the social security and medicare system, that it will go broke in 2034. So the best course of action for self-employed creatives is to begin with a Tax Deferred Savings plan NOW.
Retirement Plans for the Self-Employed
If you are self-employed or own a small business with a few employees or no employees, you may enjoy the freedom and flexibility of being your own boss. But having the ability to set your own career path and call your own shots doesn’t mean that you can neglect your retirement. While it can be challenging to save for retirement while running a business, you should try to carve out some time to focus on achieving a sense of financial freedom.
The seemingly small differences in these plans can have a big impact depending on your business and your unique needs. Take some time to compare the pros and cons as you try to find the right plan for you and your small business and understand which is best for your retirement and tax situations. I have listed below the 6 most advantageous types of tax-deferred retirements plan — and the time to begin is NOW!
1: SEP IRA
A SEP-IRA (Simplified Employee Pension Individual Retirement Arrangement) allows employers to make retirement plan contributions to its employees. In addition, self-employed individuals may create and fund a SEP-IRA retirement plan for themselves. If you decide to establish a SEP IRA, you can contribute as much as 25% of your gross annual salary or 20% of your net adjusted annual self-employment income. SEP IRA contributions cannot exceed the maximum $54,000 in 2017. I give this 2 smiles 😊 😊
Savings Incentive Match Plan for Employees (SIMPLE IRA)
This is a plan that businesses with 100 employees or less can use. And compared to a traditional 401(k), the SIMPLE really is a simpler option… But only if you intend to match your employees’ contributions. With a SIMPLE, employers must match employee contributions up to 3 percent of salary (if an employee doesn’t make contributions, you still must contribute 2 percent of their salary). Contribution limits with a SIMPLE are lower than the limits allowed in a 401(k) plan. But for some business owners, the simplicity may be worth the difference. In 2017, the maximum amount employees can generally contribute to a SIMPLE IRA is $12,500. Employees age 50 or older are eligible for a $3,000 catch-up contribution. Unless you have a large business (see above) I give these 3 big FROWNS ☹ ☹ ☹
2: Solo 401(k) Plan
A solo or individual(k) plan is a simplified version of a traditional 401(k) plan. If you are a solo business owner, meaning no other employees except maybe a spouse, a solo 401(k) is just that: your own personal 401(k) plan. The contribution limits are the same as the limits for a traditional 401(k), but because you administer the plan as well, you can match contributions as an employer up to 20% to 25% of salary. That means you can contribute almost double the traditional 401(k) limits in a solo 401(k). The maximum salary deferral contribution for 2017 is $18,000. If you are age 50 or older, you can contribute an additional $6,000 as a salary deferral catch-up contribution in 2017. The maximum profit sharing contribution is 25% of earned income, but total contributions (salary deferral plus profit sharing) to this plan cannot exceed $54,000 for 2017. You may also add the catch-up salary deferral contribution if you are eligible to make that. An individual Roth 401(k) plan option also exists providing business owners with the potential for tax-free growth of earnings. — This is BY FAR my highest recommendation if you are a SOLO business and you have high profitability — I give this 4 big fat SMILES 😊 😊 😊 😊
3: Profit Sharing Plan
A profit sharing plan is a type of defined contribution plan that lets companies help employees save for retirement. With a profit-sharing plan, contributions from the employer are discretionary. That means the company can decide from year to year how much to contribute (or whether to contribute at all) to an employee’s plan. If the company does not have a profit, it does not have to make contributions to the plan. But a company does not need to be profitable to have a profit-sharing plan.
The amount fluctuates over time with inflation. The maximum contribution amount for a profit sharing plan is the lesser of 100% of compensation or $54,000 in 2017. Additionally, the amount of your compensation that can be taken into consideration when determining employer and employee contributions is limited. The compensation limitation is $270,000 in 2017. — This will help your employees save for their retirement AND your contributions are discretionary. — I give this one 2 smiles 😊 😊
4: Money Purchase Plan
A money purchase plan or money purchase pension is a type of defined contribution retirement plan offered by some employers. Money purchase plans are like other defined contribution plans, such as 401(k) and 403(b) plans, in that both the employer and employee make contributions to the plan. What makes money purchase plans different is that they require fixed employer contributions. That means that employers must contribute a fixed percentage of each eligible employee’s salary annually to their retirement accounts.
There are limits to how much employees may contribute to a money purchase plan. The limits adjust over time with the cost of living. In 2017, contributions to money purchase plans are capped at 25 percent of the employee’s salary or $54,000, whichever is less. — As your business begins to grow, and you continue to hire employees, this is well worth giving a careful evaluation. It is a little complex, and you will need some help from a CFP Certified Financial Planner or an Actuary). = I give this 2 smiles 😊 😊
5: Defined Benefit Plans
A defined benefit plan is a good choice if you are making a substantial amount of money and want to contribute a lot more than you are allowed to contribute to a SEP, SIMPLE IRA, or Individual(k) Plan. With this type of plan, you must have what is called a third-party administrator or actuary, who helps determine the amount and timing of your contributions. The maximum contribution amount for a defined benefit plan is determined by your plan administrator based on a formula, so the maximum contribution will vary from person to person depending on the terms of your plan.
Contributions are required each year, and the contribution amount is usually substantial. This type of retirement plan is best for a self-employed person or business that has steady profits and wants to put away a large amount of money each year on a tax-deductible basis. If you have or plan to bring on employees in the future, you will have to make contributions for them according to the terms outlined in your plan document. Generally, employees become eligible for contributions when they:
- Have worked more than 1,000 hours in the year
- Have worked for you more than one year (you can set this limit to two years if they are 100 percent vested in employer contributions once those contributions are made
- Are age 21 or older
For 2017, the most an employee may receive in annual benefits under a defined-benefit plan is the lesser of $215,000 or 100 percent of the largest average salary that they earned over a consecutive three-year period. (The much-higher limit for defined-benefit plans allows employers to fund a pension that may pay benefits for the remainder of the retired employee’s life.) This is an excellent way to put money away, BUT remember that whatever you do for yourself under this plan, you must match for the employees. — I will give this 3 smiles but take half away for perplexity. 😊 😊 and a half!
6: Traditional or Roth IRAs
If you are seeking additional ways to save for retirement, the Individual Retirement Account is open to anyone with earned income (although Roth IRAs are subject to income limitations). Traditional or Roth IRAs can be used in combination with other plans, but keep in mind the amount of traditional IRA contributions you can deduct from your income taxes might be reduced. The IRA contribution limit in 2017 is $5,500 ($6,500 for ages 50 or older) and goes up to $6,00 in 2019 (with the catch up if you are over 50). This is the simplest way to put money away for retirement. If you choose a traditional IRA you can deduct the contribution on your income taxes, BUT when you retire (59 ½) you will have to pay Income taxes on your withdrawals from the account. If you go with a Roth, neither the contribution gives you any deduction on your taxes, BUT, when you retied you will pay ZERO on whatever you take out (after age 59 ½). I always recommend that you put ‘some’ money into a Roth
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About the Author
Errol Gerson is the Managing Partner at The Gerson Group Consultants, with offices in Los Angeles, London, and Johannesburg, South Africa. They specialize in strategic Financial Management planning, Strategic Tax planning, Succession Planning, Strategic Marketing and Management, Merger and Acquisition Strategies and Blue Ocean Strategy consulting.
