Once I started making money as a writer, I committed to saving 25 percent of my gross income in a separate account that was earmarked for funding my retirement. As a single, 20-something with no significant debt and low monthly expenses, it was important for me to save aggressively during this time since I knew that I would have more money leaving my account each month once I purchase a home, decide to go back to school or start a family.
It’s best to think about where you are in life and what’s a reasonable amount for you to save, but I suggest using a percentage rather than a set figure, as this number will ebb and flow with your income. As my first successful year of entrepreneurship came to a close in 2015, I sat down with my accountant and financial planner to learn about my options, including:
Individuals have up until Tax Day to contribute to a Roth IRA. The limit changes a bit each year, but for 2016 it was $5,500. These are popular because tax is paid on the initial principal, allowing individuals to withdraw money tax-free once they retire.
Traditional IRAs have the same contribution limits as a Roth IRA, but taxation is delayed until the year an individual withdraws their money. Depending on the tax bracket an entrepreneur sees themselves being in now versus retirement, one of these options could be better for their individual scenario. With both IRAs, there are penalties for withdrawing funds before age 59 ½.
The Solo 401(k)/Individual 401(k)/Self-Employed 401(k)
A perfect option for an entrepreneur with no employees — business owners can contribute up to $18,000 annually (or $24,000 if they’re over 50 years of age) and pay taxes once they begin withdrawing the funds in retirement. Financial advisors point to the Individual 401(k) as a great option for individuals with self-earned income who may also be working for an employer, such as someone who has a salaried job but also offers consulting services on the side.
Simplified Employment Pension IRA
Also known as the SEP IRA, this is the plan I ultimately decided to use after discussing all my options. An aggressive savings plan is really important to me at this stage of life, and the SEP IRA allows greater contributions than either the Roth or Traditional IRA scheme. For the 2016 tax year, SEP IRA contributions could total either 18.6 percent of self-earned net profit or $53,000 – whichever is less. It also has a scheme for entrepreneurs with employees, making it easy for me continue with this model if and when I’m ready to hire someone. Contributions are also tax-deductible, meaning entrepreneurs won’t have to pay taxes on these funds until money is withdrawn.
This option is designated for entrepreneurs with 100 or fewer employees who want to make salary reduction contributions. Employers are allowed to match up to three percent of an employee’s contribution or two percent of the employee’s compensation, although both have ceilings. For their part, employees can contribute up to $12,500 (as of 2016) each year.
The bottom line is this: even entrepreneurs will want to retire someday, and the only way to ensure a stress-free future is to start saving now.