Don’t Miss Out on Retirement Plans When Self-Employed

 

Jane Young, CFP, EA

Jane Young, CFP, EA

Just because you are self-employed doesn’t mean you don’t have access to tax advantaged retirement plans.   There are several options that may work for you depending on your situation.  One option is to contribute to a traditional IRA or Roth IRA.   In 2013, you can contribute up to $5,500 of earned income into an IRA ($6500, if you are over 49).  However, you may be restricted due to income limitations.  In addition to an IRA, consider establishing a SEP (Simplified Employee Pension), a SIMPLE IRA (Savings Incentive Match Plan for Employees) or a Solo 401k.

A SEP is a plan that enables you, as the employer, to set aside money for yourself and your employees.  The entire contribution is made by the employer, and equal contributions must be made to all eligible employees – including you as the owner.  The annual contribution is flexible, which allows you to adjust the contribution based on profitability for the year.  In 2013, contributions cannot exceed the lesser of 25% of W2 earnings or $51,000.  The limits are the same but some special rules apply, if you are self-employed. A SEP has low start-up and administrative costs with no filing requirements.  SEP plans can be of most benefit to companies with few or no employees, since the entire contribution is made by the employer. 

If you have several employees, a SIMPLE IRA plan may be the best option.  Employers are required to make a matching contribution of up to 3% or a 2% non-elective contribution for each eligible employee.  In 2013, employees may elect to contribute up to $12,000 plus a $2,500 catch-up if they are over 49.  A Simple IRA is available to any employer with up to 100 employees.  It is easy to establish and inexpensive to operate.  Discrimination testing is not required and there are no filing requirements.   A Simple IRA plan can be more practical than a SEP for companies with a lot of employees because most of the contribution is usually made by the employee.

Another option is a solo 401k. A one-participant 401k plan is a traditional 401k that covers a business owner with no employees, or a business owner and his or her spouse.  A solo 401k generally has the same rules as a traditional 401k plan.  As a business owner, you play the role of the employer and employee.  As an employee, in 2013 you can contribute up to $17,500 ($23,000 if you are over 49) – up to 100% of your compensation.  As an employer, you can contribute up to 25% of compensation.  Total contributions, not including catch-up provisions, cannot exceed $51,000.  If you hire employees who meet eligibility requirements, they must be included in the plan and their elective deferrals may be subject to non-discrimination testing.   Additionally, if your solo 401k plan has more than $250,000 in assets, you must file an annual report.

Invest in Your Career as Well as Your Portfolio

 

Jane Young, CFP, EA

Jane Young, CFP, EA

When it comes to financial planning, we generally focus on spending, saving, and investing money, and place less emphasis on career planning.  While it’s essential to properly manage the money you have saved and invested, you also need to capitalize on opportunities to enhance your earning capabilities.  Over time, investing in yourself and your career can have a significant positive impact on your net worth.  

Start by reflecting on who you are; identify your strengths, your areas of expertise and what you enjoy doing.   Identify your primary career goals; develop a personal vision statement and a personal strategic plan to help reach these goals.  Too often we leave the direction and progress of our career to chance rather than following a carefully laid out plan.  We often become comfortable and complacent in our current position, and miss opportunities to progress in our career and maximize our earnings. 

The process of investing in yourself and your career is an on-going endeavor regardless of your short term plans.   Everything you do, your relationships, behavior, and appearance all affect the success of your career.  I was reminded of this by a friend who once told me to think of myself as Jane Young, Inc.  We all have our own unique brand that needs to be developed, enhanced and reinforced. Everything you wear, say, or do creates a perception on how a potential boss or client may view you.  You need to build a brand and project an image that helps you reach your career goals.

It is also essential to nurture and grow your professional network.  Unfortunately, there is a tendency to neglect your professional network when you feel secure in a long held job.  As a result, your contacts may not think of you or may not be aware of your current qualifications when opportunities arise.  Additionally, if you unexpectedly lose your job you don’t have a solid network to tap into for help in finding a new job.

In addition to maintaining a strong professional network, it is crucial to stay abreast of innovations and changes in your career field.  Things are changing so fast that it is essential to learn new technologies and skills for your current job, as well as positions you would like to move into in the future.  You should also be taking steps to get additional education, certifications, and skills needed to meet your long term career goals.

Finally, take a proactive role in advancing your career.  You need to communicate your goals, needs, and expectations to your boss in a professional and productive manner.  Ask what is required to get a raise or a promotion, this helps establish a mutual understanding.  Be sure to consider the political dynamics within your company, and communicate your needs in a manner that illustrates the value you can provide to your boss and the firm.