Get 'er Done Saving Tips: Retirement Planning for the Self-Employed

Self-employment and entrepreneurship provides an empowering level of freedom but it also places the burden of retirement savings on the individual.

It’s vital as women that we don’t make excuses when it comes to saving for retirement.
— Sarah Behr

It’s no secret that women earn 80 cents for every dollar a man earns. In addition, women tend to leave paid-work to care for our families and it’s likely we’ll live up to 5 years longer than our male partners. Taken into consideration, the risk of women outliving their savings is serious, which is why I emphasize savings in each and every financial planning meeting I have with women.

The first step is to determine how much you need to save for retirement. There are helpful online tools that provide a general target amount to save however, a one on one meeting with a financial planner is highly encouraged to get a realistic view of your finances.  

Once you know how much you need to be saving, you must determine where to invest your savings. This can be overwhelming as the choices are broad and the tax implications are varied. It’s no wonder many of my friends and colleagues avoid financial planning altogether.

Here I’ll focus on my top three options for simple, get ‘er done savings:

  1. Traditional or Roth IRA

Contribute up to $5,500 per year (plus $1,000 catch-up contribution for 50 and older). Traditional IRA contributions are tax-deductible in the year you make the contribution. Roth IRA has an income limit which is set by the IRS (currently you must earn less than $135,000 annually to participate in the Roth program). The Roth contributions aren’t deductible but the withdrawal upon retirement is tax-free.

The Traditional/Roth  is an individual plan and you can carry it throughout your career regardless of your employment status.

2. SEP IRA - Simplified Employee Pension

Contribution can equal the lesser of $55,000 or up to 25% of net earnings (capped at $275,000 of compensation). The lesser of your contribution or 25% of net earnings are tax deductible on your tax return. Withdrawals in retirement are taxed as ordinary income.

If you have employees, you must contribute an equal percentage of salary for each eligible employee (including yourself). For example, if you contribute 10% of your compensation to your SEP IRA, you must contribute 10% of each eligible employee’s compensation.

You don’t have to contribute every year, you can wait to decide how much to contribute once you get a sense of annual revenue. This plan has less administrative burden than some other plans and the best feature is it allows you to contribute a much higher amount - which you’ll need as you gear up for retirement.

3. Simple IRA

Contribute up to $12,500 (plus $3,000 for 50 and older), contributions are tax deductible but the withdrawals upon retirement are taxed as ordinary income. If you have employees, the contributions made to the employee accounts are deductible as business expense.

As opposed to the SEP IRA, the contribution burden isn’t on you as the employer. Employees can elect to contribute as salary deferral. I like this plan best for small business of up to 100 employees.

Most online brokers allow you to open these common account types. The financial firm’s website walks you through the process and explain necessary paperwork. You’ll also want to consult your accountant to make sure you file the correct forms with the IRS.

I’m a big fan of do-it-yourself investing. I believe passive, ETF-style investing is best for most investors and a low-cost brokerage is the best value for your time and money.

In most cases, you will need to save more than the IRA limit. Once you max out your retirement account savings, consider opening a brokerage account to invest the rest of your savings and reap the rewards of compounding interest. Finally, look for a high-yield savings account to house your emergency fund. You want to safeguard your emergency fund, segregating this money from your investments, while kicking off a little interest each year.

I realize financial matters are mind-boggling, as Quilt members, we can lean on each other for advice and accountability. Band together with other women - encourage each other to establish retirement accounts and actively save. Discuss your finances, sharing our collective wisdom and get started today!