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Retirement Strategies for Salaried Employees, Self-Employed and Business Owners: Key Differences

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  • Digital Team 

In the United States, nearly half of private-sector employees, approximately 57 million Americans, do not have access to a retirement plan at work. 

Consequently, these people face financial instability and stress during retirement. 

To remain financially stable past retirement, you must plan now. This post will help you decide on a retirement strategy, whether you’re self-employed or operating a business.

Common Retirement Plans for Employed Individuals 

Salaried employees enjoy the advantages of employer-sponsored retirement plans, which provide a structured foundation for their financial future. These plans offer lucrative tax advantages and potential employer contributions, accelerating retirement savings growth.

401(k) plans

The cornerstone of many retirement portfolios, 401(k) plans allow pre-tax contributions, reducing current taxable income. They let you put money away before taxes, so you don’t pay as much in taxes now. That means you save more each paycheck.

But it gets even better because many companies will match some of your contributions. So, if you put in 5%, they may put in 5%, too. It’s like getting an instant 100% return on that 5%. 

Now, the amounts you can contribute and where you can invest might be different depending on your 401(k) plan through work. It’s a compelling way to save for your golden years. Take advantage of any employer match. Free money will help your retirement savings grow.

Pension plans

Pension plans are no longer that common. However, some companies, especially in specific fields, still offer them. With a pension, your employer promises you’ll get a certain amount of money every year in retirement. The amount is usually based on how long you worked at the company and what you typically earned. 

Now, pensions do come with some downsides. For one thing, you have less say over where your retirement money is invested. Unlike a 401(k), you can choose different funds and have more control. Also, pensions may limit your flexibility. For example, changing jobs or retiring early could be more challenging if you’re counting on a pension from your current employer.

Individual Retirement Accounts (IRAs)

Individual Retirement Accounts, or IRAs, are a great way to tuck away some extra cash for your golden years. There are two main types—traditional IRAs and Roth IRAs. Traditional means you get a tax break when you put money in. 

Roth IRAs are the opposite — you pay taxes now, but all your retirement withdrawals are tax-free. Remember, there may be limits on how much you can contribute each year.

401(k) rollover IRA

When you leave a job, you have some choices for what to do with that 401(k) savings. You can leave it with your previous employer, take the money out (but you’ll likely pay taxes and penalties), or roll it over into a 401(k) rollover IRA

Rolling your 401(k) into a rollover IRA has some excellent benefits. First, your investments will continue growing tax-deferred until you take withdrawals. Second, you can consolidate any other old 401(k)s into one IRA, simplifying managing your retirement savings. Third, IRAs usually offer more investment options than a typical 401(k).

There are two main ways to do the rollover—a direct rollover and an indirect rollover. With a direct rollover, your old 401(k) provider moves the money directly to your new IRA provider, so you avoid taxes and penalties. With an indirect rollover, you’ll get the funds. After that, you must deposit them into the IRA within 60 days. You must do this to avoid paying taxes and fees.

Consult a financial advisor before deciding. They can help you pick the best option for your unique financial situation.

Retirement Strategies for the Self-Employed

The self-employed face a distinct set of challenges in retirement planning without access to traditional employer-sponsored plans. This necessitates a proactive and often more complex approach to building a retirement nest egg.

Solo 401(k)

They’re a perfect option for self-employed individuals and their spouses to save for retirement. With a Solo 401(k), you can contribute more yearly than a regular IRA. That’s because, with a Solo 401(k), you get to make both employee and employer contributions, allowing you to save a ton in a tax-advantaged way. 

Just be aware that Solo 401(k)s have some specific rules you must follow. But if you stick to those guidelines, they’re a great way to supercharge your retirement savings as someone who works for themselves.

Simplified Employee Pension (SEP) IRA

With a SEP IRA, you can contribute a good chunk of money each year towards your retirement. The contribution limits are way higher than a traditional IRA. This makes SEP IRAs a good fit if your income goes up and down from year to year.

The tradeoff is that if you have any employees who meet the eligibility requirements, you’ll also need to make contributions for them. And that’s where costs could increase compared to just making your contributions. You’ll need to provide the same contribution percentage of compensation for each eligible employee like yourself.

Retirement Strategies for Business Owners

Business owners often intertwine their personal and business finances, creating a unique landscape for retirement planning. Their strategies usually involve a multifaceted approach, encompassing personal savings, business-related investments, and succession planning.

Selling the business

Many business owners want to get top dollar for their company when they retire. However, ensuring everything is set up just right to get the best price can be tricky. 

You’ve got to plan way ahead to boost your business’s worth and smoothly hand it off to new management or buyers. Once it finally sells, you’ll have the money from the sale to invest in your golden years. 

You can put it in things that will generate steady income in retirement. After all those years of building the business, it’s worth the work upfront to have that retirement money to enjoy. 

Qualified retirement plans

Qualified retirement plans can be categorized into two main types: defined-benefit plans and defined-contribution plans.

Defined-benefit plans guarantee a specific retirement benefit to employees, often based on their salary and years of service. The employer is responsible for ensuring the plan’s financial stability and providing the promised benefits. Examples include pension plans and profit-sharing plans.

In defined-contribution plans, the employee contributes a portion of their income to a retirement fund, and the employer may also contribute. The amount contributed and the investment returns determine the employee’s retirement benefit. The most common example is the 401(k) plan.

Offering this plan can be a valuable benefit for attracting and retaining employees, demonstrating the employer’s commitment to their long-term well-being. 

Non-qualified deferred compensation plans

These plans are a strategic tool that allows business owners to postpone receiving a portion of their income until later, typically retirement. Doing so can lower their current taxable income and associated tax burden. 

However, it’s important to note that these plans carry inherent risks. If the company faces financial hardship or bankruptcy, the deferred compensation may be forfeited, leaving the business owner without those anticipated funds.

Personal investments

It’s always a good idea to have other sources of income besides your company. Investing in other endeavors helps protect you from risks related to owning a business. Things like stocks, bonds, real estate, or other assets in your portfolio outside of work can give you more money from different sources. 

And if something happens with your business, you have other things making you money, too. It’s all about not putting all your eggs in one basket. So think about what you can invest in for yourself to help balance out relying just on your business. It’ll leave you better off in the long run.

For business owners, retirement planning involves a delicate balancing act between personal financial goals and the long-term viability of the business. Early planning, seeking professional financial advice, and exploring various exit strategies are crucial for a successful and secure retirement.

Study Your Options Now

The path to retirement varies greatly depending on one’s employment status, income level, and risk tolerance. However, the fundamental principles remain consistent: start early, save consistently, diversify investments, and seek professional guidance when needed.

By understanding the distinct challenges and opportunities inherent to each path, individuals can tailor their retirement strategies to achieve their unique financial goals and secure a comfortable and fulfilling retirement.

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