Dear Carrie, I'm 35 and am the sole proprietor of a small business. I've always been a good saver and have put some money in an IRA every year, but I know it's not enough. What else can I be doing? — A Reader
Dear Reader, for a sole proprietor, saving for retirement can be more of a challenge because basically it's all up to you. And it's difficult to put those hard-earned dollars toward the future when there's so much to deal with in the present. But you sound like you're already on the right track because you've started to save. You're lucky, too, that you're realizing this at age 35. Because yes, there's definitely more you can be doing, and the sooner the better.
A traditional tax-deductible IRA or a Roth IRA can be a good first step, and fortunately, there are other options for small business owners that can help you save even more.
An IRA is an easy place to start. While most people might automatically think of a traditional tax-deductible IRA first, a Roth IRA may be the better choice for someone your age. As you may know, contributions to a traditional IRA reduce your taxable income and earnings are tax-free, but then the tax bill will be due when you take the money out. On the other hand, you fund a Roth IRA with after-tax dollars but both earnings and distributions are tax-free after age 59 1/2, as long as the account is at least 5 years old. As a result, a young person such as yourself might benefit by paying the tax now when you're likely in a lower tax bracket than you might be later in your career.
One big caveat is that both traditional and Roth IRAs have low contribution limits, making it difficult to put away enough money for retirement. In 2018, at your age, you can only contribute $5,500 each year. In addition, you are only eligible to contribute the full $5,500 to a Roth IRA if in 2018 you earn less than $189,000. Contributions to a Roth IRA are gradually phased out for incomes up to $198,999, and not allowed at all after that.
One great option is a Simplified Employee Pension Plan (SEP-IRA), specifically designed for self-employed individuals and small business owners who want to save more and keep paperwork to a minimum. It's easy to open and lets you make fairly high annual contributions. It also gives you the flexibility to vary contributions — or skip them entirely—according to your yearly business needs.
If you ever have employees, a SEP-IRA must be set up by or for each eligible employee. You'll need to make the same (percentage-wise) contributions on their behalf as you make for yourself. They may be set up with a bank, insurance company or other qualified financial institution. Elective employee salary deferrals and catch-up contributions are not permitted in SEP plans. Employees are responsible for making any investment decisions relating to their SEP-IRA accounts.
Another choice is a Solo (Individual) 401(k)—either traditional or Roth. This plan requires a bit more paperwork but allows even higher annual contributions—100 percent of earnings up to $18,500, plus 20 percent of net self-employment income up to a total of $55,000. If you're 50 or older, you can contribute an additional $6,000 for an annual total of $61,000.
As with a SEP, you can choose to contribute or not according to your business needs. Unlike a SEP, you have the possibility of borrowing against your savings and there are additional filing requirements. One caveat: a Solo 401(k) can only include sole proprietors and spouses. If you ever want to include employees, you'd have to change plans.
The best choice for you depends on your current situation and your business goals. I suggest you talk with your accountant and financial advisor and get the details. The beauty is that depending on your circumstances you can potentially continue to contribute to your IRA, establish a SEP or Solo 401(k), plus add an HSA if appropriate, maximizing both your savings and your tax advantages. However, to me, the key to making the most of your money is to invest it. And all of these accounts give you investment opportunities.
To get started, talk to a knowledgeable friend or family member, consult with a broker or financial advisor, or look into online, automated portfolio advice available from several financial institutions. As a small business owner, you work hard. By investing as well as saving, you have a chance to make your money work as hard as you do. Best of luck.
Carrie Schwab-Pomerantz, CERTIFIED FINANCIAL PLANNER(tm), is president of Charles Schwab Foundation and author of The Charles Schwab Guide to Finances After Fifty, available in bookstores nationwide. Read more at http://schwab.com/book. You can e-mail Carrie at [email protected] The Charles Schwab Foundation is a 501(c)(3) nonprofit, private foundation that is not part of Charles Schwab & Co., Inc., or its parent company, The Charles Schwab Corporation. The information provided here is for general informational purposes only and is not intended to be a substitute for specific individualized tax, legal or investment planning advice. Where specific advice is necessary or appropriate, consult with a qualified tax advisor, CPA, financial planner or investment manager. Investors should consider, before investing in a 529 plan, whether the investor's or designated beneficiary's home state offers any state tax or other state benefits such as financial aid, scholarship funds, and protection from creditors that are only available in such state's qualified tuition program. Investing involves risk, including loss of principal. All expressions of opinion are subject to change without notice in reaction to shifting market conditions. Data contained herein from third-party providers are obtained from what are considered reliable sources. However, their accuracy, completeness or reliability cannot be guaranteed. To find out more about Carrie Schwab-Pomerantz and read features by other Creators Syndicate writers and cartoonists, visit the Creators Syndicate website at www.creators.com.
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