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How to Plan Your Financial Future

Lesson 15 of 18

Self Employed Retirement Planning

Erin Lowry/Broke Millennial

How to Plan Your Financial Future

Erin Lowry/Broke Millennial

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Lesson Info

15. Self Employed Retirement Planning

Lesson Info

Self Employed Retirement Planning

So now we are going to talk a little bit more about no employer sponsored retirement account, what do we do? And I get you because I am one of you now. I am self employed so I've had to figure out how to do this myself. One is just a plain vanilla IRA, Roth or Traditional, like I said I don't particularly care as long as you have one open. Then you've got the SEP IRA which is the Simplified Employee Pension Plan is what SEP stand for. It sounds fun because "pension" is in the title. And then you have something called a Solo 401(k), so again, 401(k)s actually can be for the self employed. I am going to briefly go over the details of these. They get very technical. I'm not saying that one is ultimately superior to the other. I'm not going to do a super deep dive. You really have to do some research for the kind of business model that you have, so I'm just going to point out some pros and cons. An IRA, right now in 2018 you can contribute up to $5,500 if you're under 50, $6,500 if you're ...

over 50, which is an okay amount of money, but we're going to get into ways that you can maybe put a little bit more away. I believe they just released the information for 2019, and that they kicked it up to $6,000. I'm pretty positive which then would be probably $7,500 for 50 and up. Not 100% sure. Might just be $7,000. Now a perk of the IRA, of course, is you get a tax deduction today if you go traditional, you get a tax break in the future if you go Roth however, there's no option to put a spouse on here. Your spouse would have to open up your own, and it's not really something that as a business owner gives you a whole lot of advantage just because this is something that pretty much anybody can do regardless of if you're traditionally or self-employed. But if you're just looking to get started, IRA is a really easy way to go especially if you're quite certain you couldn't save above $5,500 this year anyway. It's just an easy way to get started. And as I mentioned, Roth, it is income based. How much you can put away if at all. Now with a SEP, the perk of this is that you could put up to $55,000 away in a year. So if you were starting to earn big bucks as a business owner, a SEP is a way to start putting a lot more money away for the future and retirement. Because that really blows out of the water the $5,500 contribution to a regular IRA, but it's not that anyone can put away $55,000. Your option is the lesser of 25% of your total compensation or $55,000. So if you're not making that level of money, for example, if you only made $50,000 in self-employment income in 2018, you're capped 25% of your income. That's still $12,500. That still blows $5,500 out of the water. So that's why I'm saying for people who have the flexibility and the financial ability to save more than $5,500, that's when you want to look at a SEP or a Solo 401(k) so you can be putting more money away for the future. Now a potential draw back is if your business grows and you start to acquire employees, then you're probably going to have to contribute the same percentage of income to your employees as you do to yourself, so, something to consider. This is also a really good time to bring on an accountant. Which is another reason I'm not doing super deep dives into these. It is so specific to your state, your business, your tax situation. I just want you know what your options are. Again, with the Solo 401(k), similar type of structure. You can do up to 25% of compensation with a cap of $55,000, the lesser of. Also, similar to a regular 401(k), an employee can contribute up to $18,500 in 2018. Now, I don't want to get too much into the nitty gritty, but some of the reason people tout this is you could contribute as an employee and an employer if it's yours. So, it's another way to double down on opportunity. Sometimes you can also add spouses to this scenario, and it can come with a Roth option. So, if you want to be putting away post tax dollars, you can take it out tax free in the future. You can do that with a Solo 401(k). A SEP IRA really is just all pre-tax income. So, you're not getting the tax benefit in the future, you're getting it today. This plan is a good fit for someone who is self-employed, isn't planning to hire full time employees, again you have to set them up on these programs. So, if you're expanding your business, that is something to keep in mind. You're gonna need to be offering these, but I recommend you speak to an accountant or a professional if you're going through this process yourself, especially if you're looking to hire and grow your business in the future. We talked about this a little bit before. If you are self employed and you're budgeting, I said to set aside 30% of your paycheck in order to cover those quarterly estimated taxes that we have to pay. So this idea being that every time you get paid, you immediately put 30% of your paycheck into a savings account. I recommend you even nickname that account "Uncle Sam's Money" so you know exactly what it's for. Now I'm saying put aside 40% of your paycheck. And the reason I'm saying that, is because it is automatic retirement savings. I told you earlier, I actually put 45% away. I do this for a couple of reasons. One, it is forced retirement savings for myself. Two, I live in New York City so that's federal, state and city taxes that I have to pay, so I like to make triple sure that I always have enough, but with 45% getting put aside, that means I always have enough to pay tax bill, and then the remainder just get put right into my SEP IRA so I immediately am funneling money in, and I personally do it four times a year. After each time I pay quarterly estimated taxes. That's the system I have found that works best for me. But if you put aside 40% of your paycheck it does make sure you can cover your tax liability and you've got a little bit extra money to save for retirement. Because it is so easy for us to forget about this or to not focus on it, and that's why I think it's really imperative that you start to automate this process for yourself because no one else is going to do it for you. If you are self-employed, you are your own boss, you're in charge of everything from healthcare to retirement savings to probably HR and payroll and every other part of your business is on you. So I really want you to do yourself this kindness of starting to get in the habit of putting 40% away so you have money to save for the future and for retirement, and it takes out that excuse of, "I just don't have any money to put towards retirement." And I just told you, that it's all up to you. I jumped the gun a little bit, but again, it's your responsibility to take accountability early.

Class Description

Short on time? This class is available HERE as a Fast Class, exclusively for Creator Pass subscribers. 

According to the experts, millennials won’t be able to retire until they’re about 75 years old, and that’s if they’re lucky! And some data shows that three-quarters of Americans are not ready for retirement at all. No question about it, people of all ages and backgrounds are woefully unprepared for their golden years.

Most of us are too busy worrying about our current debts and daily costs of living to even think about retirement. But Erin Lowry shows you that putting just a small amount aside each month as early as possible will yield great results. She’ll give you solid advice about how to avoid excessive fees, costly financial instruments, and shady financial advisors.

Erin will also address how to talk about money with the important people in your life, especially those with whom you’ll be sharing your finances. It’s the best way to determine your financial compatibility and help you achieve your financial dreams.

In this class, you’ll learn how to:

  • Make compound interest work for you so you can retire at a reasonable age.
  • Find the right retirement account for your specific needs.
  • Figure out your level of risk tolerance and time horizon.
  • Choose an honest, helpful financial planner or advisor to help you reach your goals.
  • Navigate awkward conversations about money and feel less vulnerable.
  • Decide if you want to work as a team to achieve your financial goals.
  • Identify red flags about people’s financial habits and lives.

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Chris Sundell

Amazing course!! Great instructor! Everything that's essential is covered. This has been the kick starter to my new year. Thank you!