Part 1: Why you don’t need a self-employed retirement plan

This may sound heretical coming from a financial planner, but I believe that the majority of soloprenuers don't need an official retirement plan for their businesses.  It's not that I don't believe in saving; it's more an issue of choice, convenience and using provisions that actually apply to a soloprenuer. My objections include: Start up businesses have tight cash flow.  Soloprenuers rarely maintain a 100% long-term savings focus when concerned about current expenses and acquiring more clients.  A healthy cash reserve is key for small business owners, so even if you have the money to fully fund a retirement plan, you're probably not going to.  Many would probably prefer to re-invest into the business's infrastructure. Some plans have odd contribution provisions.  With a SEP IRA, if you ever got an employee, they couldn't contribute to the plan because SEPs are funded solely by employer contributions.  Personally, I would resent funding someone else's retirement when they have no "skin in the game." Some limit long-term usage. The self-employed "Solo" 401(k)s aren't meant for anyone except the soloprenuer and a spouse-employee.  That may be fine for a lot of people who know they'll never have any other people in their businesses, but what about those who aspire to eventually employ other people not related to them?  You'd have to stop contributing to the solo 401(k) and then start another kind of plan that your employees could contribute to. Doable yes, but I am all for keeping things simple. Others are just plain confusing.  SIMPLE IRAs require employers to match employee contributions.  You must either match employee contributions up to 3% of compensation; (that can be reduced to 1% in any two out of five years); or contribute 2% of each employee's compensation, up to $4,600.  Most people who don't speak financial-ese say, "Huh?" In theory, I don't object to matching employee contributions, but I resent being told what I can and cannot do.  I'd rather pay the extra administrative fee and have a full-out 401(k), where I can choose those provisions myself.  But then we're not talking small business anymore! The chief advantage of self-employed retirement plans is the ability to sock away more money.  In the early years of self-employment, this isn't something that a lot of soloprenuers are able to take advantage of.  For those of you who ARE at that point, you may want to check out a very good chart of small business retirement plan options <a href="http://personal.fidelity.com/products/retirement/getstart/newacc/compare_plans.shtml.cvsr?refpr=sb003" title="Small Business Retirement Plan Comparison">here</a>. Start ups don't reap the plan tax advantages.  Most soloprenuers aren't going to contribute to a pre-tax plan at a level that would significantly reduce their taxes.  The solo self-employed mainly reduce their taxable income through their Schedule C deductions, not their retirement plan deduction.  For someone in the 25% tax bracket, a $5,000 pre-tax plan contribution would reduce taxes by about 8% (note: this is VERY general, everyone's actual savings would be different). What to do?  The good news is that many start up soloprenuers' after-expenses income qualifies them to save into a Roth IRA (or a Traditional IRA).  An individual making less than $99,000 is eligible to make a full contribution to a Roth.  For marrieds the number is less than $156,000.  If you're making more than that you still might be eligible, but the amount you are allowed to contribute is phased out.  A Roth IRA will provide tax advantages in the future, instead of in the present. So, in the interest of cash management, plan simplicity and future tax advantages, clearly I advocate saving into a Roth IRA.  It may not be glamorous, but it gets the job done.  Stay tuned for my next article where I discuss in more detail the advantages of saving into a Roth IRA. 2008-11-21T00:26:49Z

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part-1-why-you-dont-need-a-self-employed-retirement-plan

2008-11-23T22:31:18Z

The majority of soloprenuers don’t need an official retirement plan for their businesses. Why? A self-employed retirement plan may unnecessarily complicate your life, for many reasons.

Part 1: Why you don’t need a self-employed retirement plan

2009-02-24T09:47:19Z