In “Retirement Plan Options for Independent Contractors,” published by NerdWallet this past fall, financial planner Dave Rowan outlines some of financial tools independent contractors can use to save for a time when they no longer work.
SIMPLE IRA: The Simple IRA or Savings Incentive Match Plan for Employees lives up to its name when you are doing contract work as a solo operator; it is less simple for those who have hired employees. These plans have employer-matching contribution rules that but don’t let that scare you if you think the SIMPLE IRA will work for your enterprise.
As an individual, you can put in $12,500 each year if you are under 50 ($15,500 if you are older than 50). As you can see, the lists for the SIMPLE IRA go above those of traditional IRAs.
SEP-IRA: The SEP-IRA or Simplified Employee Pension plan allows you to put away up to 25% of your pre-tax pay to $53,000. If you have employees, you will have to also contribute the same percentage to your employees’ retirement accounts as you contribute to your own.
Solo 401(k): With this plan you can have earnings go right to the plan (the first $18,000 if you are under 50; the first $24,000 if you are over that age). Once you’ve contributed your first earnings, you can then add 25% of your salary up to $53,000. There is also a possibility of borrowing from these plans but Rowan notes that with only five years to repay, you have to consider carefully before borrowing. Rowan also warns that these plans come with a lot of paperwork.
Independent contractors can also opt for traditional and Roth IRAs as retirement plan options. Rowan advises “Weigh your options in light of the contributions you can make now, how much you think you’ll be able to contribute in the future and whether or not you’ll remain a solopreneur or will hire employees at some point.”
This is a brief overview of retirement plans that an independent contractor can choose. If you want to consider more options and work on strategic financial planning to secure your financial future, contact a Fee-Only financial planner.