WHEN YOU WORK FOR SOMEONE ELSE, an employer-sponsored plan, automatic contributions from your paychecks, and—if you’re lucky—a company match can make saving for retirement easier. “But as an entrepreneur, investing for retirement is entirely up to you,” says Thomas Carter, vice president of Personal Retirement Strategy & Solutions at Merrill Lynch. Below he offers some tips to help you plan for your financial future.
✔ Start a savings plan. A popular option for the self-employed is a Simplified Employee Pension, or SEP IRA, says Carter. “These have a much higher contribution limit than traditional IRAs.” Generally, a sole proprietor with no employees can make deductible contributions of as much as 20% of her earnings from the business, up to the maximum annual limit ($54,000 for 2017)1.
For traditional and Roth IRAs, the maximum is $5,500 ($6,500 for those age 50 and older). As with traditional IRAs, you contribute pretax dollars to a SEP IRA, which won’t be taxed until you withdraw the funds in retirement.
✔ Contribute steadily. Freelancers often contribute one lump sum to a retirement plan at year’s end, says Carter. “But that means investing a year’s worth of savings all at once,” he says. Regularly contributing smaller amounts may allow you to capture lower prices as markets fluctuate, depending on the market prices at the time you contribute.
✔ Seek additional income. If your gig doesn’t let you sock away enough money for retirement, look for other ways to generate income. This doesn’t mean you have to start an entirely new business venture. “Perhaps you have a spare room to rent out,” Carter says. “Or you might consider driving for a ride-sharing company a couple of evenings per week.”
3 Questions to Ask Your Advisor
- Could a SEP IRA be right for me?
- How much can I afford to put toward retirement savings each year?
- What are some more ways I can boost my retirement savings?
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1 For additional information on calculating maximum contributions for self-employed individuals, see IRS Publication 560 or consult your tax advisor.
Keep in mind that dollar cost averaging cannot guarantee a profit or prevent a loss in declining markets. Since such investment plan involves continual investment in securities regardless of fluctuating price levels, you should consider your willingness to continue purchasing during periods of high or low price levels.