The Benefits of State Retirement Plans For Self-Employed Individuals

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As the retirement savings mandates in Oregon, Connecticut, and other states are rolling out, small business owners need to understand the benefits of these programs.

These plans are designed to save employees more money for their future, but they also come with many benefits for employers.

Tax-Free Savings

Self-employed people can save significant amounts of money tax-free by taking advantage of the benefits of state retirement plan. These plans may be cheaper to maintain and set up than other options, such as a Roth IRA, a Keogh Plan (now known as a qualified or profit-sharing plan), or a Roth IRA.

Because of these advantages, many companies decide to provide these state schemes, or at the very least give them some thought, even if they already have a private retirement plan. More than half of states require businesses under a specific size to sign up for a state-facilitated IRA plan or offer their employees a secret project that meets state requirements.

Tax-Free Earnings

While it can be tempting to ignore retirement savings when you’re self-employed, setting aside a portion of your income is critical. It is especially true given that it might be challenging to plan a budget for the future when your earnings are unpredictable. Fortunately, you’ll find that many retirement account options are designed to make saving for retirement easy and cost-effective.

For example, a Simplified Employee Pension (SEP) IRA is ideal for freelancers and sole proprietors. The account lets you contribute up to 25% of your net self-employment earnings, which can be lower than your taxable income for that year. In addition, you don’t have to fund the account every year or pay a penalty for missing the annual funding requirement.

However, a solo 401(k) may be better suited for those who wish to save more than 25% of their income. A solo’s contribution limits are higher than a SEP’s. Before choosing the ideal strategy, you need to weigh your possibilities thoroughly.

Tax-Free Distributions

A well-chosen retirement plan can help self-employed people save more for retirement than they could in a taxable brokerage account. However, there are many options, and they all have rules, requirements, and contribution limits.

You can contribute up to 25 percent of your self-employment net income yearly to a SEP IRA (or 401(k). But contributions must be made with pre-tax dollars, which are taxed at your marginal income rate when you withdraw.

A traditional IRA has no such restrictions. But it has lower contribution limits and requires that you begin taking taxable withdrawals at age 70 1/2. That’s why more and more self-employed people are choosing a solo 401(k), which has higher contribution limits and is easier to administer than an IRA.

Access to Investment Options

Several states have established state-facilitated retirement programs to help small businesses save for their employees. However, these plans may require that the business complete complex plan administration tasks such as filing, reporting, and adjusting contribution limits. It can be challenging for smaller companies that need more staff or resources to do this work independently.

The first step is to evaluate your current financial situation and determine what savings goals you want to achieve in retirement. It would be best if you also thought about the lifestyle you envision in retirement and how that will affect your expenses.

The most popular options for self-employed individuals are Simplified Employee Pension (SEP) IRAs and solo 401(k) plans. These accounts have higher contribution limits than traditional IRAs and don’t exclude you from contributing to other accounts like a Roth or Traditional IRA. Another option is the Keogh or HR 10 plan (more commonly referred to as a qualified plan), which has high contribution limits but requires more paperwork. These plans are available to small business owners with 100 or fewer employees and are not subject to the exact employee participation requirements as a SEP IRA.

Pre-tax Contributions

While self-employment offers the freedom and flexibility to create a fulfilling quality of life after retirement, it also means figuring out how to save for that future entirely on your own. Thankfully, there are options for doing just that.

Pre-tax contributions to a retirement account (including 401(k) matches and individual retirement accounts, like an IRA or a SEP IRA) reduce your taxable income for the year, lowering your tax bill. In addition, the money in these accounts grows tax-deferred until it’s withdrawn from the plan, typically after retirement.

State-facilitated IRA programs can be an excellent option for small businesses without the time or staff to manage a traditional 401(k) or other workplace retirement savings plan. The program requires employers of 25 employees or more to offer an objective and automatically enroll workers; smaller or newer companies can participate voluntarily. Its contribution limits are less than those of a 401(k) and traditional IRA. However, it has the added benefit of being easy to set up and administer.