Planning for Retirement When You Work from Home
There’s a good chance retirement is far from your mind when you’re gearing up to start a home-based business. You’re more excited about your new job and being your own boss.
Maybe you’re just fearful, thinking there aren’t many options for small businesses and sole proprietors. The world of finance can be pretty daunting, afterall.That last sentence is true, for sure, but setting up a retirement plan for yourself is actually pretty simple. Small business owners and sole proprietors have three main choices – a Simplified Employee Pension plan (SEP), a Simple IRA or an Individual 401k. Stay with us as we breeze through what each does.
In a nutshell, the SEP lets you contribute up to a certain amount each year (up to 25% of your earnings, with a maximum cap of $44,000 in tax year 2006). Typically the amount is higher than the contribution limit for Traditional or Roth IRAs. As with most retirement accounts, earnings on your savings are tax-deferred until they’re withdrawn. And of course, you get the added benefit of reducing your taxable income with each contribution – that means you pay less come tax time.
If your home business takes on a few employees, a Simple IRA may be the way to go. The plan offers most of the benefits of a 401k without IRS reports to file. In addition, employers can deduct their contributions as a business expense and employee participation is voluntary and there’s no required contribution level for those who do choose to participate.
Maybe you’re the lone wolf in your home business. If so, an Individual 401K could be your best bet. It’s not a viable plan for a business that will add a non-spouse employee, but it works very well for self-employed investors and their spouses or small business owners. Current tax laws allow contributions up to 25% of earnings. The contributions are generally deductible as a business expense and generally there isn’t a fee to set up an account. Keep in mind that your contributions will be invested in mutual funds, so take the time to pick one or more that suit your needs – there’s one suited for just about every investor.
Did you get all of that? The main thing to remember is that you need to do it. Now that you have a little knowledge under your belt, make the call to an investment firm and get started. You’ll be better off in the long run and your wallet will thank you come April 15.