As someone who is self-employed, you have the unique ability to control your own retirement plan. This might be an overwhelming prospect if you are unfamiliar with retirement planning, but once you have familiarized yourself with the process, you will find this total control to be quite beneficial.
The following are a few issues to should consider as you begin the process of selecting a plan:
- Tax benefits: Some types of retirement plans allow you to make larger contributions than others. The larger the contribution you can make, the larger the tax break you are likely to receive.
- Plan costs: Certain types of retirement plans are more expensive and require more work to maintain. You may need to hire a financial planner to help you determine your contributions. In other cases, you may need to file certain reports with the government. You should decide if the costs (of both time and money) are outweighed by the benefits of your potential plan.
- Required contributions: Some types of retirement plans require you to make minimum annual contributions, while others allow you to contribute at your leisure. If the amount of money you make varies from year to year, you might want to have some more flexibility with your contributions, something you won’t be able to get from every type of plan.
- Deadlines: There are deadlines to establish your plan. Sometimes that deadline is December 31 of the year you wish to begin making contributions, while others can be established before tax return due dates.
Common plan examples
The following are a few of the most common types of retirement plans used by people who are self-employed:
- SEPs: A simplified employee pension (SEP) plan offers you some much-needed flexibility. You can contribute up to 25 percent of your business income up to $54,000, but there is no minimum contribution at all. You are never locked into a contribution amount, so if you had a great year you can max out your contributions, while if you had a down year you can simply skip your contributions.
- Solo 401(k): A solo 401(k) plan gives you higher contribution caps and provides you with similar flexibility to an SEP. However, it requires more work to set up than an SEP, and once your plan reaches a certain size, you must file a special tax return for it.
- Roth IRA: A Roth IRA contains investments in stocks and bonds through mutual funds and other investments. The total contributions allowed for an IRA is whatever is less between your taxable income and the limit for your age. Limits grow higher as you get older, as well.
For more information and guidance on your best strategies for planning your retirement while self-employed, meet with a trusted estate planning attorney in the U.S. Virgin Islands.
Ravinder S. Nagi is Assistant Managing Attorney and Chair of the Labor and Employment Practice Group at BoltNagi PC a respected and well-established labor and employment law firm proudly serving clients throughout the U.S. Virgin Islands.