Retirement planning for the self employed

Planning for retirement is a daunting task, especially when you’re self employed. There’s no 401k match, no company wide consultations – you’re on your own to decide what to do.  And, as much as we all joke about it, we know that working until we’re 80+ can’t always be an option.

Roth IRA

The idea behind a Roth IRA is that you’ll pay tax now on your contributions, and when you pull money from your IRA in several years, you won’t need to pay any tax then. Why pay taxes now if you can save them for later? Inflation is one reason.

You can also write off the tax paid on your investments annually.

A cool thing that differentiates a Roth IRA from a 401k is that you can pull out any of the principle you’ve contributed at any time without penalty. That doesn’t count for any earnings, just what you’ve contributed. In that regard, you can look at this as a savings account, except you’re earning way more interest here than you would in any of the currently offered savings account options. ***I’m not suggesting you pull funds out of your IRA early, it’s just comforting to know that could if you had to, right?

Another interesting note is that you can only contribute to a Roth IRA until your individual income reaches $139,000 or your household income reaches $189,000 per year. With that, I think it’s best to contribute to this while you can, and when you’ve reached your limit, switch over to a traditional IRA.

Traditional IRA

Contribute now, tax deferred. In this stipulation, you won’t pay any taxes on the contributions until you pull out your funds.

Getting Started

Don’t be afraid to start small. I started my IRA with just $25 per month. Each year, I’ve steadily increased my contributions to a place where I felt comfortable. The goal should be to eventually max out your contributions, which will be $5,500 annually.

You can contribute to both a Roth and a traditional if you’d like, as long as you only contribute the max $5,500.

With retirement planning, it’s often getting started that’s the hardest part. Starting small is better than waiting on it entirely.