By Deborah Jeanne Sergeant
Sole proprietors don’t have an employer matching their 401k contributions or setting up a pension program.
They do have options for saving for retirement — and it’s important to start doing so early.
“You can do so many things,” said Terri Krueger, chartered financial consultant, senior financial adviser and owner of Krueger Advisors, LLC in Syracuse.
She listed a simplified employee pension (SEP), SIMPLE IRA, solo 401(k) and traditional IRA for those with modest earnings from their business.
“If your business is growing and you have revenue that’s very high, you can borrow from yourself from a non retirement account,” Krueger added. “There are also insurance policies that can grow tax-deferred and transfer to heirs tax-free which will help them with the tax implications they will receive.”
She encourages people planning for their retirement to enlist the help of a financial adviser who can address their specific situation.
In addition to the Roth IRA and regular IRA savings vehicle, Cynthia Scott, a chartered financial consultant and founder and president of OMC Financial Services, Ltd. in DeWitt, advises the solo 401k for those who have registered their business as an LLC.
“They can contribute as employee and as employer,” Scott said. “The amount they can contribute is quite substantial. I have a client who can contribute $50,000 a year. It’s based on income. It gives someone substantially more money to put away if they have it.”
The solo 401k is only an option to sole proprietors — not entrepreneurs who have employees.
Saving for retirement through investments should be regular and not sporadic. Contributing systematically to an IRA, Roth IRA, SEP IRA or solo 401(k) builds capital, explained Randy L. Zeigler, certified financial planner, chartered financial consultant and private wealth adviser with Ameriprise Financial Services in Oswego.
Although matching contribution from an employer “would be great, the bigger issue is getting money invested to support one’s retirement,” Zeigler said. “I strongly advise my clients to diversify their retirement investments and not treat their business as their primary retirement asset.”
Some people believe that once they’re ready to retire, they can live off the proceeds of the sale of their business. Unfortunately, that doesn’t always work out the way they had imagined. Their heirs may not possess the funds or credit rating required to buy or borrow to buy the business, for example. Or they may not have interest in taking over the business at all.
Selling to someone outside the family may not work out as a means to fund retirement either.
“A business may not be worth what the owner expects or forecasts when it is actually time to retire, ––as industry trends and values can change,” Zeigler said. “Building retirement investment capital to support one’s retirement, in addition to the business value, helps to create greater surety of the ability to retire in a financially sound position or at an earlier age than anticipated — should that be needed due to health or family circumstances.
“Business owners can always create non qualified investment accounts in addition to qualified plans like IRAs, SEP IRAs and 401(k) plans as noted above to build retirement capital too.”
Popular Financial Retirement Plans for Sole Proprietors
• Simplified employee pension (SEP) — An individual retirement account (IRA) available to employers or self-employed people that often has higher contribution limits that annual and higher than regular IRAs and 401(k)s. Account holders can skip contributions in years when the business revenue is down.
• SIMPLE IRA — A traditional IRA for small companies and self-employed people that offers tax-deductible contributions and tax-deferred growth until withdrawn in retirement. Self-employed people can contribute 25% of their net earnings, up to $61,000 in 2024.
• Solo 401(k) (aka individual 401(k) – Self-employed people act as the contributing employer and employee, meaning the contribution level is higher than a traditional 401(k) since the self-employed can match their own contribution and the contributions can help lower the taxable income. The investments allowed include stocks, bonds, mutual funds, exchange-traded funds, real estate investment trusts and more. Withdrawals after age 59.5 are free from federal income tax.
• Traditional IRA – It wasn’t really designed for self-employed people but can still work for them. The contributions are tax-deductible up to $7,000 per year (plus $1,000 additional “catch-up” contributions for those older than 50).
