Self-employed? The odds are high that you aren't saving enough for your retirement years. A 2013 survey by TD Ameritrade found that nearly 70% of self-employed individuals weren't saving regularly for retirement — and 28% weren't saving anything at all. Those are alarming numbers. But they don't surprise ReKeithen Miller, certified financial planner with Palisades Hudson Financial Group in Atlanta.
"You hear stories about employees with traditional full-time jobs struggling to save enough for retirement. And they have 401K plans already established for them. They just have to sign up," Miller says. "Just imagine how difficult it can be for self-employed people to save enough."
That's where a Simplified Employee Pension — better known as a SEP-IRA — can help. It's an excellent retirement savings option for the self-employed.
The Basics of a SEP-IRA
A SEP-IRA works much like a traditional IRA. Self-employed individuals can deposit their savings into an account and then watch their earnings grow on a tax-deferred basis until withdrawal. This means that you if you deposit $10,000 of the money you earn as self-employed worker into your SEP-IRA, you won't have to pay taxes on this income until you withdraw it.
Like a traditional IRA, you won't face any penalties for withdrawing money once you hit age 59½. If you withdraw sooner, though, not only will you have to pay taxes on your distribution, you will also have to pay an additional penalty tax of 10% on the money you withdraw.
One important change from a traditional IRA, though, is the amount of money you can contribute. You can deposit 20% of your net business income for the year or a total amount of $53,000 — whichever is less — into a SEP-IRA for 2015. By contrast, you're only allowed to contribute a maximum of $5,500 — $6,500 if you are 50 or older — into a traditional IRA each year.
Creating the Retirement Savings Habit
So why do so few self-employed individuals save regularly for retirement? Miller says that self-employed workers are often under stress, worrying about irregular income streams and scraping together enough for estimated income-tax payments.
This means that saving for retirement too often becomes less of a priority.
"When you are self-employed, you have a lot to think about," Miller says. "You have to get your own health insurance. You have to set a marketing budget for your business. You might have to deal with employees. Saving for retirement is not one of the top things on the list, even though it should be."
Others might worry that they don't have enough extra income to make a dent in their retirement-savings shortfall. But Miller says that this thinking is misguided.
"Something is better than nothing," Miller says. "It's better to save what you can than to not save anything at all."
Other self-employed individuals worry that starting a SEP-IRA will take time that they need to instead devote to running and growing their businesses. Again, though, this thinking is incorrect, Miller explained. "Setting up a SEP-IRA is easy," he said. Individuals can quickly set up a SEP-IRA in minutes by calling their local bank or a national financial services company.
And once individuals have a SEP-IRA up and running, they aren't required to make any specific amount of contributions each year. You can contribute $25,000 one year, no dollars the next, and $9,000 a third year. There is no required minimum contribution to a SEP-IRA.
Where to Sign Up
Now that you're interested in retirement investing via a SEP-IRA, you should know that there are several online services you can use to open an account. Many of these allow you to sign-up and make contributions online or by phone, simplifying the process. These services range from traditional brokers to robo-advisers, each with varying perks and fees, so pay attention to the details. Some sample services include:
Automated investment service, Betterment offers a SEP-IRA with no transaction or trade fees. They also offer 4 months to 1 year free, depending on your deposit.
MerrillEdge offers a SEP-IRA with no program or administrative fees. Trades may cost $6.95 per transaction, however.
Online broker giants Fidelity and Vanguard also offer SEP-IRAs with no set-up fees. These services do charge for trades, however.
- A number of credit unions and banks also offer SEP-IRAs; check with your local provider for details and online account availability.
The lesson here? It's time to start saving in a SEP-IRA today.