Nearly half of the self-employed make this mistake – The Fool Motley

Being independent is not easy. You must not only fight the fluctuation of your income, but you must also pay taxes on self-employment that can be a major financial burden throughout the year. As such, it is easy for self-employed people to let their retirement savings fade away. This is a serious mistake, however, as you may run out of money in retirement.

Unfortunately, about 44% of the self-employed do not actively save for retirement, according to a recent report by T. Rowe Price. The reason? This could in part result from a lack of stable income, but accessibility to pension plans could also play out. In fact, it is estimated that only 28% of traditional employees do not save for retirement, which could in part be explained by the fact that 401 (k) plans offer easy participation.

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If you are a self-employed person who has fallen into the retirement savings business, know that you have several plans that can help you create a real abyss. Here are some that you should know.

1. The traditional IRA

An IRA, or individual retirement account, is something that anyone with earned income can contribute. This year, you can invest up to $ 6,000 if you are under 50 or $ 7,000 if you are 50 or older. This money also goes tax free, which means that the IRS can not tax you on the amount of income you assign to your account. From there, your money will grow with the tax deferred until you are ready to make withdrawals at retirement (which are then taxable at that time).

2. The Roth IRA

The Roth IRAs have the same annual contribution limits as traditional IRAs, except that they benefit from the opposite tax treatment. Since contributions are made after tax, there is no immediate benefit to financing an account. Withdrawals are however tax free in retirement. Another thing you need to know about Roth IRAs is that high earners (single filers earning more than $ 137,000 and group filers earning over $ 203,000) can not contribute directly to a Roth IRA. If this is your case, you can still finance a traditional IRA and convert it to Roth afterwards.

3. The SEP IRA

In short, the SEP IRA is an IRA designed for the self-employed and small business owners. Its main advantage is that it offers higher contribution limits than a traditional IRA or Roth. For the current year, you can contribute up to 25% of your net business income for up to $ 56,000. Like traditional IRA contributions, this money is tax-free, but withdrawals are ultimately taxed at retirement.

4. The SIMPLE IRA

In abbreviation for an employee incentive compensation plan, the SIMPLE IRA is another IRA designated for the self-employed and its contribution limits are higher than those of a traditional IRA or Roth. For the current year, you can contribute up to 13,000 USD to a simple IRA if you are under 50 or 16,000 USD if you are 50 or older. These contributions are tax-exempt, which means immediate savings, but withdrawals are taxed later.

5. The solo 401 (k)

You do not need to work for someone else to gain access to a 401 (k). All you have to do is open a Solo 401 (k) and you will enjoy the same benefits as a 401 (k) traditional, with one important difference: the potential to contribute even more to your account . For 2019, you can contribute up to 25% of your net income from self-employment to a maximum of $ 56,000 if you are under 50 or $ 62,000 if you are 50 or over. more. This money becomes tax free and withdrawals are taxed at retirement.

You might think that being a self-employed person would put you at a disadvantage in terms of retirement savings, but in reality, the self-employed more choice when it comes to building a nest egg. If you have neglected your savings up to now, it's time to refocus and change your priorities. Without a substantial amount of savings, you risk having financial difficulties in the long run and after so many years of hard work, you deserve better.