How to prepare for retirement when you’re self-employed

If you’re a permanent employee, all of the benefits your employer provides may go largely unnoticed. However, if you’ve recently made the transition from being an employee to being your own boss, the safety net you once took for granted is now conspicuously absent. Your employer-sponsored healthcare is out the window, your Social Security and Medicare contributions are no longer managed for you and your 401(k) is now a thing of the past.

In a previous post, we provided financial planning strategies for paying self-employment taxes. This week, we’ll discuss how self-employed person can plan for their retirement.

In lieu of an employer-sponsored retirement plan, there are several options for retirement contribution available to a self-employed person:

• Simplified Employee Pension (SEP): This is a good option for freelancers who may have unpredictable incomes. You decide how much to contribute based on the funds you have available – up to 25% of your net income (and not exceeding $61,000 for 2022).
• Individual 401(k) plan: This works much like a traditional 401(k) and is only available to sole proprietors with no employees. Contribution limits are the same as for an SEP (above).
• Savings Incentive Match Plan IRAs: This is for self-employed people with a maximum of 100 employees. You can contribute up to $14,000 in 2022 ($17,000 for 2022 if you’re at least 50 years old).

Being self-employed can be an extremely rewarding experience. However, ensuring that you have adequate funding to pay your taxes each year and still have money left over to support you through retirement requires much more thorough and deliberate financial planning than it does for employees. A skilled tax attorney can help you develop a robust payment plan to ensure you stay afloat.