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IRA Financial Blog

Few Self-Employed are Saving for Retirement

How to save for retirement while being self employed

Not enough self-employed individuals are saving for retirement, according to data from a University of Michigan study conducted in 2012 and 2014. The data showed that 72% of non-self-employed individuals who work in large (and mid-sized) companies contribute to their work-sponsored retirement plan, a stark contrast to the 13% of self-employed individuals who participate in a workplace retirement plan.

Why Self-Employed Individuals Aren’t Saving for Retirement

It is generally believed that self-employed individuals fare worse than the non-self-employed because they face the challenge of accessing a workplace retirement plan. Additionally, self-employed individuals have to do all of the “heavy lifting” in regards to establishing the plan, whereas employees who work at mid-to-large sized companies already have a work-sponsored retirement plan, which often includes automatic enrollment. Furthermore, when employees are eligible to participate in the plan, their company often notifies them that the plan is available for enrollment.

Ultimately, these factors make it easier for employees to participate in a work-sponsored retirement plan.

The Pew Charitable Trusts recently analyzed the 2012/2014 study and released a few interesting facts. Of the three groups that were studied (employees who work at a company; self-employed at a multi-person company; self-employed at a single-person job), both self-employed groups trailed behind non-self-employed workers. However, while only 13% of single-owner individuals participate in a workplace retirement plan, the number is more than doubled among self-employed individuals in multi-person companies: 30% participate in a workplace retirement plan.

The Self-Employed in Multi-person Companies Own More Assets

Numbers don’t lie, and it is clear that self-employed individuals are falling short when it comes to participating in a workplace retirement plan. However, the University of Michigan study revealed that, while fewer self-employed individuals in a multi-person company participate in a retirement plan, they own more assets than their non-self-employed counterpart. While the former owns $186,000 in median plan assets, employees at a traditional company have only $51,000 in plan assets.

According to Pew, this “discrepancy” exists because of the professions among multi-person companies. Many of the individuals are established in professional, high-earning fields, such as lawyers, doctors and engineers, therefore have more to put aside for retirement.

Retirement Options for Self-Employed Individuals

While self-employed individuals are not saving as much for retirement, retirement options do exist. First, there is a Traditional or Roth IRA, which has no eligibility requirements and allows plan participants to put aside a maximum contribution of $6,000 ($7,000 if age 50 and older) for 2019. However, the government has designed two plans specifically for self-employed individuals: The SEP IRA and the Solo 401(k).

We have made a case for both self-employed retirement plans. Multiple, in fact. Yet we always recommend the Solo 401(k) for the self-employed economy. Here’s why:

Solo 401(k) for the Self-Employed

What is a Solo 401(k)?

The Solo 401(k) retirement plan is a traditional 401(k) that is designed for small business owners with no full-time employees and individuals who generate self-employment income. The plan includes all of the attractive features of a Traditional 401(k), but with a few added benefits and no costly administrative requirements.

Additional features of the Solo 401(k) for the self-employed:

Higher Maximum Contributions: Plan participants can set aside an annual contribution of $56,000 to the Solo 401(k) ($62,000 if age 50 and older).

Tax-Free Loan: You can borrow up to $50,000 or 50% of your account value (whichever is less). You can use the Solo 401(k) loan for any purpose tax and penalty-free.

Easy Administration: There is no annual tax filing or information returns for a plan that does not exceed $250,000 in assets. If it does exceed $250,000, you must fill out IRS form 5500-EZ.

LLC is Not Required: LLCs can be costly, depending on which state you live in. With a Solo 401(k), the trustee (you) can make investments without the need of an LLC.

Strong Creditor Protection: Most states offer better creditor protection for this retirement plan than a Traditional IRA. Additionally, Solo 401(k) Plan assets are protected against creditor attack in a bankruptcy proceeding.

Roth After-Tax Benefit: You have two formats with a Solo 401(k): pre-tax, or Roth (after-tax). With a Roth 401(k), your money can grow tax-free and when you withdraw at retirement, you pay no additional taxes.

Non-recourse Leverage Exception: You can invest in your own business and in real estate with non-recourse funds without having to pay the UBTI tax on the debt-financed portion of the property.

Tax-Deferral: All income and gains on your investments go back to your plan tax-free until you take a qualified distribution.

Investment Diversity: You can make almost any investment with the Solo 401(k) plan. This includes traditional investments (stocks, bonds, etc.) and alternative investments (real estate, private business/private placements, etc.) but make sure you do not trigger the IRS prohibited transaction rules.

Wrapping it Up

Although it is not surprising that fewer self-employed individuals participate in a workplace retirement plan than non-self-employed individuals, it’s important to know that, if you are self-employed, retirement options are available. If you are eligible for the Solo 401(k), establishing your plan at IRA Financial is quick and simple. Contact us today at 800-472-0646 if you are interested in learning more.


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