Whether permanently or temporarily, by choice or by circumstance, many of us are self-employed these days. We’re in this gig economy, where so many of us are making our own livings with our own small businesses. That’s great. Except for one thing: People who are self-employed have to provide their own benefits, and that includes retirement. There is little good data on self-employment participation in retirement plans, but it’s probably low – because participation in all retirement plans is low.
It doesn’t have to be that way. Self-employed people have many ways to take care of their retirement needs: paying into Social Security, opening a retirement account and owning your own home.
Pay into Social Security.
Yes, the self-employment tax is a killer, but you want to have at least 40 quarters – 10 years – of contributions to SSI before you retire. Otherwise, you won’t receive Social Security. Furthermore, your benefit is based on your 35 years of highest income; if you’re close to retirement, check out the Social Security benefits calculators. You don’t want to work so hard at minimizing taxes that you cheat yourself out of a major benefit.
Open a dedicated retirement account.
You have three main options: The Simple IRA, the Simplified Employee Pension (also known as a SEP-IRA), and the Solo 401(k). In general, the Simple IRA is best for businesses with a few employees, the Simplified Employee Pension is best for most self-employed people and the Solo 401(k) offers the most flexibility – and the most paperwork requirements. The IRS has all the details on its website.
Most financial advisors, mutual funds companies, and brokerage firms can set these accounts up for you. If you have employees, you may need professional tax advice to ensure that your plan is fair. The main concern the IRS has is that a plan will be discriminatory, meaning that it is set up to give the boss a big tax break and ignores the retirement needs of the employees.
Naturally, it’s not enough to have the account: You need to fund it. The more money, the merrier – about 15% of your earnings, if you can swing it – but any money you set aside will help you get ahead in the long run. As an added bonus, your contributions will reduce your tax bill.
Own your place of residence.
It’s not easy for self-employed people to get a mortgage, because their income isn’t always steady. However, if you own the place in which you live, then you won’t have to worry about housing costs in retirement. If you’re paying taxes and have a retirement account but don’t own your home, start saving the money to buy one. You will probably need a larger down payment than someone with a wage, but you can get a mortgage. You can consider taking your entrepreneurial skills into a new direction by buying a small apartment building and taking on tenants, or you may be able to turn part of your house into office space in order to receive the home-office tax deduction and save money on rent you may be paying now.
It’s tempting to put all of your money into the business – or to spend it as a reward for your hard work. I get it. I’ve been self-employed for 15 years now. I’ve contributed to retirement every year, too – sometimes, just a few hundred dollars, other years, quite a bit more. That’s all part of the flexibility that comes with working for yourself.