America has always been an entrepreneurial nation, and many of us dream of becoming our own boss someday. The number of workers who are self-employed has grown by 14 percent since 2001 to 10.6 million, according to research by Economic Modeling Specialists International. This doesn't even count the number of people with full-time jobs who make extra income on the side.
Unfortunately, many entrepreneurs are terrible at retirement saving. That's understandable because income can be volatile when you are self-employed. Retirement saving can be easy with automatic deductions, but when income isn't stable, it's hard to commit to saving a set amount every month.
Many entrepreneurs put most of their extra income into building their business, and that's admirable. But they still need to save for retirement. Building a business is great, but you also need a nest egg in case something goes wrong. Here are some retirement saving options specifically for entrepreneurs:
SEP IRA. The simplified employee pension plan is a great way to contribute to a pre-tax retirement savings account. As an employer, you can contribute up to 25 percent of your net self-employment income. The limit is $51,000 for 2013 and $52,000 for 2014. However, the SEP IRA does not have a Roth option. Note: If you have employees, you will have to contribute the same percentage of salary to their retirement accounts.
Individual or solo 401(k). A solo 401(k) plan is for entrepreneurs with no employees (or just a spouse). As an employer, you can contribute up to 25 percent of your net self-employment income. As an employee, you can contribute up to $17,500, the standard 401(k) contribution limit. If you are 50 or older, you can increase the limit by $5,500 to account for catch up contributions. The limit for total contributions to the participant's account is $51,000 in 2013 and $52,000 for 2014. The solo 401k can be a Roth 401(k), if your investment company supports it. The individual 401(k) plan also might have a loan option, depending on the investment company.
Flexibility for entrepreneurs. These plans have a much higher contribution limit than a traditional 401(k) plan. This is great for entrepreneurs because some fiscal years might be better than others. They can contribute a large amount in the good years, and cut back during the lean years.
These plans are also an option for those with side income. They can contribute up to $17,500, the 401(k) limit, at their regular job's plan and save extra with the SEP IRA or individual 401(k). Saving 25 percent of self-employment income is a great way to reduce your tax liability and give your retirement savings a big boost.
Entrepreneurs have to invest in their businesses in order to become successful. That's why they put profits back into the business and often neglect retirement saving. Some business owners count on the future sale of their business to fund their retirement, but that is not always a sure thing. Neglecting retirement saving isn't advisable, because we will all grow old someday, and there will be a point when we can no longer work. It's better to be save for the future outside your business, so that your retirement security is not dependent on the success of the company.
Joe Udo blogs at Retire By 40 where he writes about passive income, frugal living, retirement investing and the challenges of early retirement. He recently left his corporate job to be a stay at home dad and blogger and is having the time of his life.