Financial Planning

In an unstable economic landscape where layoffs are increasingly common, many independent minded individuals decide to create their own job by starting their own business. Self employment and business ownership demands unwavering focus on doing whatever it takes to build and grow a successful enterprise. Unfortunately, the attention that is typically given to running the business does not always carry over to the realm of careful planning for retirement. However, with the assistance of self employed retirement calculators such as those readily available on the internet, and a wealth of information about available retirement plans, a financially secure future is within reach for independent businessmen and women.

It is not uncommon for would-be business owners to be scared away by the substantial self employment tax burden that comes with being one’s own boss. On balance, however, the many tax advantageous retirement options available to the self employed can serve to outweigh what is sometimes seen as a negative factor. Some time spent with one of many available self employed retirement calculators will demonstrate that it is often possible for independent business owners to commit more funds to their retirement plans than typical wage earners could ever fathom. The most commonly discussed plans aimed toward the self employed include Keogh plans, simplified employee pensions (SEPs), Roth IRAs and solo 401(k) plans.

Keogh plans are the most like typical corporate retirement plans of any of those utilized by self employed individuals. Two types of Keogh plans exist, namely the profit sharing Keogh and the defined benefit Keogh. Contributions to each are deductible as long as the plan is put into place prior to the end of the tax year. The profit sharing version permits contributions of a percentage of all income earned from self employment or monies earned as an employee of one’s own company, up to $49,000. Formal plan documents are necessary, and annual reports will need to be filed with the IRS.

The purpose of a defined benefit Keogh plan is to generate an annual retirement benefit of a predetermined amount, up to $195,000. For this type of plan, an actuary will need to be hired to determine the necessary contribution amount to attain the desired annual benefit. One of the many available self employed retirement calculators can help with a preliminary estimate of what might be required. Keogh plans are favored by many because they permit greater contributions than other types of plans, and are therefore rather more attractive to older taxpayers.

Simplified employee pensions, or SEPs, are streamlined, basic retirement plans which permit contributions and deductions of up to 20% of one’s self employment income or up to 25% of income earned as an employee of the company one owns. The individual taxpayer may allocate varying percentages each year, which is useful in situations where cash flow may be uncertain from year to year. Self employment retirement calculators are useful in determining an appropriate allocation in a particular year. There are no annual IRS reporting requirements for SEPs, and they may be established at anytime up to the date of any income tax filing extension received by the taxpayer.