How Entrepreneurs With a Late Start Can Save for Retirement

Entrepreneurs often become so focused on building their businesses that they may not stop to think about saving for retirement. But time passes quickly, and planning ahead for the future is essential. Now is the time to investigate the retirement plans available for entrepreneurs and the self-employed.

Use a SEP-IRA

The Simplified Employee Pension, or SEP-IRA, is designed especially for small business owners or people who are self-employed. The plan costs nothing to set up and can be opened by filling out a few forms. There are no administrative fees.

The contribution limit is high compared to traditional IRAs. Entrepreneurs can contribute up to 25% of their net earnings from self-employment. Additional catch-up contributions are allowed for people over age 50. The contribution amount can change from year to year, which makes the SEP-IRA a flexible option for people whose income or profits may be unpredictable.

Use a Defined Benefit Plan

A defined benefit plan is a cash balance plan that creates a pension with a guaranteed income after retirement. It’s a good choice for business owners for several reasons. A cash balance allows much larger contributions than other plans. Moreover, tax deductions are allowed for a larger dollar amount than other retirement plans. Spouses can also contribute. The funds are protected from creditors. 

After retirement, a predetermined amount of distribution is received. It is subject to taxes. The contribution amount requires a complex mathematical formula and is determined by an actuary.

Use a Solo 401(k)

Large corporations offer 401(k) plans to their employees, but there is also a 401(k) designed especially for sole proprietors or independent contractors. These solo 401(k) allow the self-employed person to contribute both as an employee and an employer of himself or herself for up to 9 times the amount allowed for regular IRAs. The spouse of the solo 401(k) owner can also contribute, and catch-up contributions for ages 50+ are allowed.

The solo 401(k) is easy to manage and can be set up as either a tax-deferred plan or a Roth plan. Plan owners can borrow from it in amounts up to $50,000 or half of the value of the account. Funds are protected from creditors.

Each retirement plan has advantages and disadvantages that must be carefully examined and suited to the individual situation of the entrepreneur. However, all of them offer effective ways to save for retirement within a short timeline.

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