Saving for Retirement: What Is the Best Plan for a Self-Employed Business Owner?

Talus Saving for Retirement

5 minutes The benefits of running your own business far outweigh the constrictions of working in a corporate environment. Being your own boss allows you complete creative freedom and promises a greater sense of fulfillment. But running your own business also puts the burden of success squarely on your shoulders. Self-employment makes saving for retirement more challenging as you’re missing out on employer-paid retirement contributions. That said, you do have access to several tax-advantaged retirement accounts that may help you save more because of your self-employed status. When seeking out retirement funding, you have a few different options—a traditional IRA, Roth IRA, SIMPLE IRA, SEP IRA or Solo 401k. Each of these plans is complex and varied, so you’ll need to determine the best fit for your situation. Let’s take a look at the rules surrounding each option. Traditional or Roth IRA According to Pew, 35% of private-sector workers don’t have access to an employer-based retirement plan, making an IRA a great starting place. Anyone with earned income can open an IRA. It’s one of the easiest ways to save for retirement when you’re self-employed. Depending on which type of IRA you choose (traditional or Roth), you can pay taxes at the time of the contribution or later, when you withdraw funds. If you’ve recently made the jump to self-employment, you can roll over your 401k into an IRA. Just remember, you’re in charge of your IRA, and that means you’re in charge of selecting mutual funds and other investments. Here are the differences and rules for each of these options. When opting for a traditional IRA, the IRS allows you to deposit up to $6,000 per year if you’re under the age of 50 and $6,500 per year if you’re over 50. Your contributions are tax-deductible and are not taxed until you withdraw funds. Traditional IRAs come with a great feature for non-working spouses. The breadwinner has the option to fund an IRA for their non-working spouse, allowing the non-working spouse to save for the future using a tax-advantaged retirement account. This is called a spousal IRA. While there are no income limits dictating what you can contribute to a traditional IRA, there are limits as to what you can deduct from your taxes. However, since the limits are based on whether you’re covered by a qualified retirement plan at work (401k), these won’t affect you if you work for yourself. RELATED: Business Budgeting, Cash Flow and Taxes A Roth IRA, on the other hand, comes with income and contribution limits. As of 2019, single filers must have a modified adjusted gross income of less than $137,000. If you’re married and filing jointly, your adjusted gross income must be less than $203,000. And if you’re married and filing separately (and you lived with your spouse in the last year), your modified adjusted gross income must be less than $10,000. If you exceed the limits that apply to your situation, you cannot contribute to a Roth IRA. One of the big advantages of a Roth IRA over a traditional IRA involves the withdrawal fees. You can withdraw money contributed to a Roth at any time and for any reason without paying taxes or penalties. That’s because you paid taxes when funding the account. The annual contribution limit for 2019 is $6,000 if you’re under 50 and $7,000 if you’re age 50 or older. When you reach age 70 ½, you will be required to withdraw a specified amount from a traditional IRA account each year. The amount you’re forced to withdraw is known as a Required Minimum Distribution (or RMD). Some retirees opt to convert a portion of their retirement savings to a Roth IRA to avoid the RMD. According to Ed Slott, a nationally recognized professional speaker and author of numerous financial and retirement-focused books, the key factor in making this decision should be how soon you’ll need the funds. “It doesn’t pay to convert to a Roth if you’re going to need the money in 10 years,” Slott explains. “As a business owner, you could need money to keep you afloat. Do a cost-benefit analysis because it’s not worth the tax cost if the conversion won’t parlay long term.” In other words, if you’re going to need the money soon, don’t convert to a Roth IRA. The hit you’ll take paying taxes at the time of conversion will outweigh the benefit of potential growth. It’s also worth noting that, technically, you can’t borrow money from your IRA. However, there’s an exception to the rule. If you only need the money for a short period of time—60 days or less—you’re allowed to withdraw the money provided you redeposit the funds within that 60 day window. This is known as the rollover rule. RELATED: How the Changes in Tax Law Affect You and How to Prepare Solo 401(k) A Solo 401k, also known as a One-Participant Plan, permits you to fund your plan from both your personal compensation and business income. This means your annual contributions could be significantly higher. Solo 401(k)s work just like company-sponsored 401(k)s. The difference is they’re intended only for self-employed workers or individuals who employ no full-time workers (other than themselves and their spouses). With a Solo 401(k), you can contribute up to 25% of your self-employment income per year until you reach the cap—$54,000 if you’re under 50 and $60,000 if you’re 50 or older. According to IRA123.com, you must meet two eligibility requirements to benefit from a Solo 401(K): The presence of self-employment activity The absence of non-owner full-time employees You (the business owner) and your spouse are considered “owner-employees” rather than “employees,” and as such can work full-time for the business. The following types of employees typically don’t interfere with eligibility for a Solo 401(k): Employees under 21 years of age Employees who work less than 1,000 hours annually (full-time) 1099 contractors Some union and non-resident alien employees Although it should only be used as a last resort, you may borrow from the funds in your Solo 401(k) […]

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How to Find the Right Health Insurance Plan for Your SMB

Talus small business health insurance

5 minutes Most full-time workers look to their employer to offer health insurance coverage. But that safety net quickly disappears when you start a small business. Getting the right health insurance coverage is crucial for self-employed people—from solopreneurs working as freelancers to small mid-sized business owners who hire employees. To gain insights into finding the right health coverage, we talked to Tim Jackson, president of Health Insurance Specialists, Utah-based business that helps individuals and small businesses find the right health insurance coverage. Jackson notes that some of the following comments may only be applicable to the workforce in Utah, but the overarching theme applies to business owners everywhere. Q: What types of business owners do you work with? Jackson: I work with a lot of small, small business owners—I’m talking about freelancers, people who have less than 10 employees. I even work with, like, “mom and pop [shops]” where it’s literally a husband and wife who run the company. Q: In your experience, what are small business owners most concerned about when shopping for insurance? Jackson: I’ve literally watched thousands of people make a decision on health insurance. You can get as analytical as you want. You can crunch the numbers all day long. But when it comes down to it, people make a decision on health insurance based on two things. Can they afford it? Can they sleep at night? That is how people make a decision about health insurance. And I can break down prices all day long. I can get as analytical as you want. But really, it comes down to a number they feel they can afford. And can they sleep at night knowing that they can potentially have a deductible of $5,000, $6,000 or $7,000? RELATED: Applying for Small Business Grants and Loans Q: Solopreneurs and owners of very small businesses typically purchase individual health insurance. What should these folks keep in mind when shopping for the right coverage? Jackson: Because they are a small business owner, typically their adjusted-gross income, it can be low because they have write-offs. Because their adjusted-gross income could be low … that means they could qualify for a tax credit. That’s usually the first thing I bring up to people, because if they want affordable health insurance, the most affordable way to get health insurance is with a tax credit. And that’s for those who qualify based on their personal adjusted gross income. That’s sometimes a hard number to nail down for people. I try my best to nail it down and help them to understand the consequences of how the tax credit works. Q: As a business grows and hires employees, small-group coverage can become necessary. How does an employer know when the time is right to switch to this type of plan? Jackson: Usually when a small business starts a group plan—when I get that call from the employer—it’s because the employee has asked about it. That’s typically what happens. And it could be for a couple of reasons. One, it could be that they are trying to attract someone, so they want to hire an employee and they’re trying to find good talent and they talk to the [potential] employee and the employee [currently] has a job that has good benefits. In today’s world, that’s kind of become mandatory—and it’s kind of a deal-breaker, really. So, the one reason people get into a group plan is to attract employees. And the other reason is for retention. Now they have the employee and they are trying to keep them, and that employee is getting recruited from the guy across the street. And the guy across the street is offering benefits. So now [the business owner is] coming to me and he’s saying, “Hey, I need to do something to keep my employees around.” Health insurance has become one of those major things that people count on and hope for help with. So, that’s where the small employer comes in and has to come in and find a group plan to help keep employees. Q: What should a small business owner consider when choosing such a plan? Jackson: When you’re going to find an employee, you better find a plan that they like, or that they are going to be okay with. There’s a big balance in this because you see employees who come from a large corporation where the corporation pays for a large amount of the premium and they have really great plans. And then you have the small employer that comes along and he’s never had [to pay the entire cost of] health insurance. Now, all of a sudden, he’s looking at a bill of several thousand dollars a month, and that’s something he wasn’t quite expecting. So, they have to be able to figure out what [they can] afford and what can they offer. But you’ve got to be able to offer something to employees that’s enough to attract them and to keep them around. RELATED: Business Budgeting, Cash Flow and Taxes Q: How can a small business owner best strike that balance? Jackson: When you are a small employer and you’re going to offer a plan, you have to be able to offer enough to keep the employee around, but you have to also balance what you can afford. And that’s one of the challenges I see employers have. They want to be able to offer something that would make someone happy or that would attract someone, but they also have to be able to afford it. So that’s that balance—what I call the “carrot and the stick.” When the Affordable Care Act came around and we called them “qualified [health] plans,” they had all these requirements, they covered several things like maternity and doctor’s appointments and prescriptions and those kinds of things. That made the plans very expensive, or a lot more expensive than they used to be. Those are qualified plans. And back when it was mandatory to have health insurance, employers wanted […]

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