Traditional IRAs and Roth IRAs aren't exclusive to the self-employed, but people who work independently or who own their own business can contribute to these plans. Traditional IRAs allow you to make tax-deductible contributions, and Roth IRAs allow after-tax contributions, and money grows tax-free. A Roth IRA is one of the essential retirement savings tools for self-employed workers. It's already quite difficult for people with traditional employment to save for retirement, and even more difficult for the self-employed.
For those looking to convert their IRA into gold, there are options available to help them do so. A Roth IRA is a type of retirement account that allows people to contribute after-tax money to an account. Then, their money is tax-free and account holders can access the funds in their accounts once they turn 59, without paying any tax on their distributions. Simply put, Roth IRAs are particularly good for people who expect to pay a fairly high tax rate when they retire. That includes many self-employed workers, such as small business owners who could withdraw money from their companies later in life.
Did you know that? The increase in self-employment is one of the factors behind the decline in workers' retirement coverage. Traditional retirement savings plans allow people to deduct their contributions from their taxes, but require them to pay taxes on retirees. Roth plans require you to contribute money after taxes, but they allow you to deduct any withdrawals you make during retirement. However, keep in mind that contribution limits for accounts with tax requirements, such as IRAs, are not considered separately.
If you contribute money to a Roth IRA, you won't be able to contribute the most to other types of retirement accounts either. Also, not everyone can use a Roth IRA. Your modified adjusted gross income must be below certain limits, which vary from year to year and depending on your tax-reporting status. SEPs are taxed as regular income during retirement, unlike Roths.
However, you can make pre-tax contributions to an SEP. Basically, an SEP allows you to defer the taxes you owe until retirement. With a Roth, you pay income taxes in advance. The possibility of contributing to both an SEP and a Roth is an advantage for the self-employed, since it makes it a little easier to save.
The rules are detailed on the IRS website. Look for a brokerage firm with good customer service and no account fees. All major brokerage firms (Fidelity, Vanguard and Schwab) offer Roth IRAs, as do smaller brokerage firms. Look for a brokerage agency that offers to maintain the account for you without charging you a fee.
You may also want to keep your Roth IRA with the same company that offers SEP or other types of IRAs. Since you're self-employed, look for a brokerage agency that employs advisors, such as Merrill Lynch, or a discount agency, such as E-Trade, that offers good telephone support and advice on choosing investments. You can also hire an independent investment advisor or financial planner. One of the easiest options is a high-quality fund with a deadline, which will automatically adapt your investment mix to your age as the years go by.
You can also ask your brokerage agency to buy a selection of mutual funds or exchange-traded funds (ETFs). . One of the factors you can best control is rates. Look for low fees on any investment you choose.
Remember that any profit increases tax-free; that's one of the best things about a Roth IRA. Since you're self-employed, you don't have the crutch of automated deductions and escalations like traditional employees do. Set up automatic monthly deductions from your bank account to your Roth IRA. Small, regular contributions over time can help you return.
If you're self-employed and don't have a financial advisor, the only person who can do that is you. So, be sure to diversify into stock and bond funds, perhaps also into international stock and bond funds. Workplace changes place the burden of saving for retirement on you, but the tax code gives you the tools you need to succeed. While the main pillar should be an individual 401 (k) plan, remember that a Roth IRA, HSA, cash balance plan and taxable account offer additional options.
If you have one of those accounts, you may want to convert it into a 401 (k), like your new individual 401 (k), to facilitate future Roth Backdoor IRAs. In addition, using the i401 (k) IRA instead of an SEP IRA allows you to create a clandestine Roth IRA, since the balance of an SEP IRA is included in the mandatory prorated calculation (explained below). The only “expensive” part is the cost of employer contributions (homeowners' dollars) that must be donated to participating employees in order for the plan to approve tests of non-discrimination. However, keep in mind that a SIMPLE IRA may require the employer to make contributions to the plan, even if the company has no profits.
I have a side job with a small amount of income and I opened a 401,000 solo plan for that independent contractor job. Make sure that the individual 401 (k) plan you choose has features that are important to you, such as Roth contributions, IRA account renewals, or 401 (k) loans. The biggest difference between an SEP (simplified employee pension) and a Roth IRA is that the SEP has much higher contribution limits. Just keep in mind that if your investment is leveraged, you'll be subject to unrelated business income tax in a self-directed IRA (but not to a self-directed 401 (k)).
Whether you're employed or self-employed, you can also contribute to a personal clandestine (indirect) Roth IRA and, if you're married and have sufficient income, to a clandestine marital Roth IRA. If you are self-employed or have income from self-employment, you can open a simplified pension plan for employees, more commonly known as IRA SEP. Instead of making a direct contribution to a Roth IRA, you first contribute to a traditional IRA, which is not deductible due to your high income, and then transfer that money to a Roth IRA. .
