How to Save for Retirement as an Entrepreneur


August 18, 2021

3:25 min

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Check out these types of investment accounts to consider when it comes to setting yourself up for success in retirement as an entrepreneur.

Here are three popular investment accounts to help self-employed people be successful in retirement.

Owning your business has many benefits, but what about retirement? Whether you recently started your business, or have been self-employed for a while, it’s important to have a retirement plan. But where do you start?

Check out these types of investment accounts to consider when it comes to setting yourself up for success in retirement as an entrepreneur.

Types of Plans

First things first, you need to know your options. There are many different types of retirement accounts to choose from, so the best place to start is by evaluating your current financial situation and business needs. Whether you’re the only employee, or need retirement plans for your business, here are three types of retirement accounts for entrepreneurs.

Simplified Employee Pension (SEP) IRA

A SEP IRA is a popular choice for sole proprietors. This type of plan can provide a significant source of income at retirement by allowing employers to set aside money in retirement accounts for yourself and your employees. The annual account fees are generally less expensive, and you can invest as much as 25% of your net income up to a cap. The cap changes periodically as it relates to inflation. The SEP IRA has flexible funding options, and contributions are tax-deductible. According to the IRS, here are pros and cons to a SEP IRA:

  • Available to any sized business.
  • Easy to set up and operate.
  • Low administrative costs.
  • Flexible annual contributions – good plan if cash flow is an issue.
  • Employer must contribute equally for all eligible employees.

Savings Incentive Match Plan for Employees (SIMPLE) IRA

If you’re a current business owner, and are thinking about expanding your business, the SIMPLE IRA could be a good option to consider. This account allows employees and employers to contribute to traditional IRAs set up for employees. You can continue investing if you’ve hired an employee, however, you’ll need to match of an employee’s contribution, up to 3% of their pay.

Keep in mind, there’s a 25% penalty if you make a withdrawal from the account within two years of opening. According to the IRS, SIMPLE IRA plans do not have the same start-up and operating costs of a conventional retirement plan. Here are a few pros and cons of this type of account:

  • Easy and inexpensive to set up and operate.
  • Employees share responsibility for their retirement.
  • No discrimination testing required.
  • Inflexible contributions.
  • Lower contribution limits than some other retirement plans.

Individual 401(k)

If you’re looking to quickly build up your retirement account, have more funds to contribute, and are a sole proprietor, an Individual 401(k) is worth considering. This account works similar to a Traditional 401(k), except you can add your spouse to the plan. Since you’re your own employee, you can contribute up to $19,500; or $26,000 if you’re more than 50-years-old. If you’re adding a spouse to the plan, the two of you can double up on contributions if you’re ages 50 or older. This plan is not available to additional employees. To see your 401(k) balance by the time you retire, check out our 104(k) calculator.

In addition, an Individual 401(k) can be beneficial if you’re needing to take a loan out for your business. Rules may vary, but usually you can borrow half of the account’s balance up to a limit and pay back in five years. According to the IRS, the borrowed funds are not taxed or subject to the 10% early withdrawal penalty because the IRS treats this as a loan paid back to the account.

For specific contribution and plan information, please visit the Internal Revenue Service (IRS) website about retirement plans for self-employed people. As you compare plans, be sure to research any fees associated with investment accounts. Also, consider if you need a plan to include employee participation.

Before making any decisions regarding your retirement, it’s beneficial to consult your financial advisor. As always, we’re here to help you make the most of your retirement years. Contact us to see what plan would fit your needs and to get started.

Category: Retirement

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