When you’re self-employed, investing for retirement is entirely up to you. Here are some ways to put away money for your future.
- Start a savings plan. A popular option for the self-employed is a Simplified Employee Pension, or SEP IRA, says Thomas Carter, vice president of Personal Retirement Strategy & Solutions at Merrill Lynch. "These have a much higher contribution limit than traditional IRAs." Generally, a sole proprietor with no employees can make deductible contributions of up to 20% of her earnings from the business, up to the maximum annual limit ($53,000 for 2016).
For traditional and Roth IRAs, the maximum is $5,500 ($6,500 for those aged 50 and older). As with traditional IRAs, you contribute pre-tax dollars to a SEP IRA, which won't be taxed until you withdraw the funds in retirement.
- Contribute steadily. Freelancers often contribute one lump sum to a retirement plan at year's end, says Carter. "But that means investing a year's worth of savings all at once," he says. Regularly contributing smaller amounts may allow you to capture lower prices as markets fluctuate, depending on the market prices at the time you contribute.
- Seek additional income. If your gig doesn't let you sock away enough money for retirement, look for other ways to generate income. "Perhaps you have a spare room to rent out," Carter says. "Or you might consider driving for a ride-sharing company a couple of evenings per week."
3 Questions to Ask Your Advisor
Keep in mind that dollar cost averaging cannot guarantee a profit or prevent a loss in declining markets. Since such investment plan involves continual investment in securities regardless of fluctuating price levels, you should consider your willingness to continue purchasing during periods of high or low price levels.