Episode 24: What Works Wednesday: Retirement Planning For Self Employed Professionals

In today’s episode of What Works Wednesday I discuss how to successfully prepare for retirement as a self-employed professional. I go over three retirement vehicles that can be utilized when saving for retirement: a SEP IRA, Simple IRA, and Solo 401(k). Giving yourself the freedom to retire whenever you want is something that all Self-Employed professionals desire and utilizing the right tools and retirement accounts is a great way to do that. Tune in for valuable insights on effectively structuring your retirement savings on this self-employed journey. Join us for the third installment of "What Works Wednesday" and learn how to master the art of saving for retirement during self-employment.

Links:
PeaceLink Financial Planning LLC

TRANSCRIPT

Leland Gross (00:01.27)

Welcome back to another episode of What Works Wednesday. It's a wonderful season of the year for W2 employees because October, November marks open enrollment, which is the season where they get to go through this menu and choose their health insurance, which one they want, their life insurance, their disability insurance, their retirement, all of these benefits that are provided to them through their employer. But as a self-employed professional,

Unfortunately, we don't get that same luxury. We don't have a 401k offered to us through our employer because we are our employer. We don't have a health insurance plan. We don't have these same things offered to us in a nice pretty menu at a discounted rate with employer matches and things like that. But that doesn't mean we don't need those things, right? We obviously need health insurance, life insurance, retirement planning. So what do we do? Oftentimes I work with...

entrepreneurs and other self-employed professionals. And this is a huge hang up. This is a huge place where they're like, I on paper, I'm making more money, but you know, I don't have health insurance at all on retirement. How do I, how do I do these things? How do I prepare for retirement? So today I want to talk about retirement specifically because when you're a W-2 employee, you have a 401k or a pension or a 403b, these plans where you contribute money, your employer matches it, which is awesome. Then it grows.

And it's an easy way to accumulate a ton of money so that one day you can say, I don't want to work anymore. And you have enough saved to be able to live the rest of your life and not have to worry about running out of money. Many entrepreneurs would say, yeah, I don't have that, but you know, I'm going to sell my business one day and that's going to be more than enough. And if you do that, heck yeah, killer. That's going to be a wonderful, wonderful day, the day you sell your business. But in reality,

less than 80% or yeah, more than 80% of businesses never actually end up selling. So if you're an entrepreneur, you have to be considering what do I do? Because I've never met someone who said, I started my business so that I could work long hours, nights, weekends, pay my own taxes, figure that out. And I want to do this until I die. No, the innate heart of an entrepreneur typically is freedom.

Leland Gross (02:26.662)

I don't want to have a boss. I don't want someone micromanaging me. I want autonomy over my time, unlimited upward income potential. We have this vision of a lifestyle and that's what educates the work we do and why we decided to go out on our own. But typically we don't want to do that work forever because of innately the heart for freedom. So what do you do if you know you don't want to work forever? And sure you may sell your business one day, but chances are, you know, 80% or higher that you won't.

How do you prepare for retirement without a 401k or pension or these other retirement-specific plans? Many times I see entrepreneurs just maxing out IRAs, Roth IRAs, and those are not bad tools. They're tools to be used. But they have really low maximum contribution limits. It's $6,500 if you're under 50 years old. Well, if you make more than $45,000 in a year, that's not a big enough percentage of your income.

So if you're making 100, 200, $400,000 a year, maxing out your IRAs is not gonna get you to a place where you can retire healthy. We need to save more than that. We need to invest more of that. Plus we want it to be a business deduction for us, as well as a personal if possible. And so there are these three tools that the government's created. The IRS wants to support business owners. And so they've created these specific small business retirement plans.

that many entrepreneurs don't know about. So I want to just run through those quickly to let you know this works. What works Wednesday? Using one of these three tools works and throughout your career, you may jump between them depending on your business and the stage it's in. So the first is a SEP IRA, S-E-P, Self-Employed Pension IRA. How this works is you can contribute, it's all contributions come from the business. So Leland Gross, employee, doesn't actually save a dime.

Leland Gross business owner contributes to Leland Gross employees IRA. So it's a business deduction, which is great. You can contribute up to 25% of Leland Gross employees compensation. So if I am paying myself $60,000 as a salary, I can contribute from the business $15,000 to my SEP IRA. That's over double the traditional IRA limit.

Leland Gross (04:53.182)

Now that goes up all the way to where the most I think this year you can do is 73,500. That's if you're over age 50. I think it's lower, 63, 64, it changes per year. But you can save tens of thousands of dollars depending on how much you pay yourself into this account as a business deduction. Now the downside to a SEP IRA is whatever you do for yourself, you have to do for all your employees. So if you have a business, a small business, and you have other W-2 employees working under

and you contribute 25% of your pay, you have to do 25% of each of their pay as well. So the numbers might not work out. You might want to do 10%, you might want to do five, or you might want to use a different tool. But a SEP IRA is a great option if you are a self-employed professional as a way to, hey, I've paid myself. I still have money in the business. I need a tax deduction. I can move this into a SEP IRA where I can save more than a traditional IRA.

as a business deduction and it's now locked away from me personally for retirement. Another way to take your business and benefit yourself personally. Second is a simple IRA. So some people would say, well, yeah, I have employees and so doing a SEP is just not gonna be realistic. So a simple IRA works like a 401k in some ways for small businesses where your employee can set up a simple IRA, you set up a simple IRA.

and they can contribute to it more than the, more than the, what am I saying? More than the IRA limit. So as opposed to 6,500, it's 15,500. So they can contribute more. And as a business owner, you can match that money. So you can give yourself a match. Now that match is either 3%. So just if they contribute 3% of their pay, if you contribute 3% of your own pay, that gets matched. Or you can do,

2% non-elective. Non-elective means whether or not you or your employees contribute, everyone gets 2% of their compensation put into a simple IRA for them. So your employee doesn't have to contribute, you're just going to give them 2%. Or you can do they have to contribute and you're going to match it up to 3%. They can do more than 3% if they want, but you're going to match up to 3%. This is a great tool if you have a team underneath U of W to employees. It's a great tool.

Leland Gross (07:20.522)

If you don't want to deal with the administrative headache and the cost of setting up a 401k, you can always set yourself up with a 401k, but that cost can be expensive. And again, it's another way that you can say personally, I'm going to contribute, I'm going to get a tax deduction, Leland Gross employee personal for my contributions and Leland Gross business owner, the business gets a deduction on the match. So that's a great option. So SEP IRA, Simple IRA.

Last is something called a solo 401k. So a traditional 401k, you've got a lot of rules and hoops you have to jump through because the government really wants to make sure that employers are being fair to their employees. So it's under a law called ERISA, and I'm not gonna go into that, but it's costly. There's a lot of administrative work that goes into 401ks, but they're great because you can save so much more into them.

If you work by yourself, you have no employees, except you can have your spouse. So you and or your spouse work together, no one else, you can set up something called a solo 401k. You get rid of the administrative burdens of a big 401k plan, but now you're able to save even more money because the contribution limit, if you're under 50 years old in 2023 is 22,500.

or 30,000 if you're over the age of 50, just as the employee. So the employee can contribute up to 22,500. Then because you are the employer, you can now match that money and profit share. And so depending on how the numbers work out, it's more complicated than just, you know, just throw money in there. You can save pretty easily up to the maximum, which is 64,000 or 73,500. Um, so this is a great tool.

So oftentimes when I'm working with clients, we will consider these three different tools, the different pros and cons to each, how you can access the money, when you can access the money, to try and discern which one's best. And really the question is, which one allows you, based on your business, your situation, your income, your tax considerations, which one helps you get the most bang for your buck? Because at the end of the day, we are business owners and we're individuals.

Leland Gross (09:43.542)

and we built this business because we had a vision for a lifestyle, like I said earlier. So how do we, legally, professionally, use our business as a tool to benefit our lives personally? And these benefits, the Solo 401k, Simple IRA, and SEP IRA, are great tools to do that. And so we just need to sit down and figure out which one works best for you. But a lot of people didn't know that these things even existed, which is why I wanted to get on here on What Works Wednesday and go through that with you. So,

Be sure to go check those out if you own your own business. Be sure to sit down and do your due diligence to see, all right, what can we do? What makes the most sense for my business? And create your own quote unquote open enrollment period. Because some of these things you can set up by January 1 for 2024 and get running on it. So sit down and say, what is my cashflow? What are my tax considerations? How much do I need to save? Do I have an employee or employees?

And therefore, which plan is going to get me the best bang for my buck and run with it because you want to run your business well, you want to build the life you desire. You don't want to do it till you're 90 and in a home still trying to run your business. So with that, go forth, prosper and get the life you want from your business. Happy What Works Wednesday.