10 Retirement Planning Tips for the Self-Employed


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In a Bind? Borrow from Your 401(k)
When you run your own business, there are times when you have cash flow issues. Fortunately, you can borrow from your 401(K), depending on how it is set up. iStockphoto/Thinkstock

IRS rules are pretty strict about when you are allowed to withdraw money from your retirement plan. If you do it before you reach 59½, you usually have to pay a 10 percent early withdrawal penalty plus income tax on the distribution. But what if you really need that retirement nest egg to pay off credit card debt or put a down payment on a home? If you have a 401(k), you can actually lend the money back to yourself.

Yup, most 401(k) plans allow you to loan yourself up to half the total value of your savings up to $50,000 (but not the SIMPLE and the SEP IRA) [source: IRS]. Interest rates vary, but they are typically much lower than a traditional bank loan and they are many times lower than the rate on your credit card debt [source: Wall Street Journal]. In some cases, it makes very good sense to borrow from your 401(k) to pay off high-interest debt. Use this calculator to figure out what it will cost to pay back a 401(k) loan and compare it to the interest payments on your credit card balance.

401(k) loans have their own rules. They must be paid back in five years, unless the money is used to buy a primary residence for the borrower. Otherwise, you can use the loan for whatever you want, as long as you pay up on time. If you default, the loan will be treated as an early withdrawal, triggering the 10 percent penalty and income taxes [source: IRS]. Conventional wisdom says to borrow only as much as you need, not as much as you can get [source: Wall Street Journal].

Finance Planning Tips

Here are some tips to help you with generating income and planning for the future.

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Author's Note: 10 Self-employment Retirement Tips

I am one of the 15.3 million Americans who are self-employed. I love the flexibility of being my own boss and the ability to deduct all manner of expenses from my taxable income. What I don't love are the high monthly premiums for awful health insurance coverage, the panic of trying to balance a household budget with irregular paychecks, and the sinking feeling that we are failing to save enough for our future. I chose the self-employed lifestyle, but not everyone is so lucky. One of the reasons for the boom in the self-employed workforce is because regular jobs are so hard to come by. For construction workers who have been labeled "independent contractors" to avoid payroll taxes, or moms watching the neighbors' kids for extra cash, "being your own boss" means barely scraping by. I applaud the independent American spirit, but fear that we are substituting "self-employed" for "underemployed."

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Sources

  • Hill, Catey. "4 Ways the Self-employed Can Save for Retirement." Forbes. Sept. 17, 2010. (April 12, 2013) http://www.smartmoney.com/retirement/planning/4-ways-the-self-employed-can-save-for-retirement/
  • Hipple, Steven F. "Self-employment in the United States." Bureau of Labor Statistics. September 2010. (April 12, 2013) http://www.bls.gov/opub/mlr/2010/09/art2full.pdf
  • Humphreys, Nancy K. "Self-Employed Social Security Nightmare." The Huffington Post. Feb. 18, 2013. (April 12, 2013) http://www.huffingtonpost.com/nancy-k-humphreys/self-employed-social-secu_b_2712265.html
  • IRS. "Choosing a Retirement Plan – Defined Benefit Plan." (April 12, 2013) http://www.irs.gov/Retirement-Plans/Choosing-a-Retirement-Plan:-Defined-Benefit-Plan
  • IRS. "Choosing a Retirement Plan – SEP." (April 12, 2013) http://www.irs.gov/Retirement-Plans/Choosing-a-Retirement-Plan:-SEP
  • IRS. "Choosing a Retirement Plan – SIMPLE IRA Plan." (April 12, 2013) http://www.irs.gov/Retirement-Plans/Choosing-a-Retirement-Plan:-SIMPLE-IRA-Plan
  • IRS. "One-Participant 401(k) Plans." (April 12, 2013) http://www.irs.gov/Retirement-Plans/One-Participant-401(k)-Plans
  • IRS. "Retirement Plans FAQs on Designated Roth Accounts." (April 12, 2013) http://www.irs.gov/Retirement-Plans/Retirement-Plans-FAQs-on-Designated-Roth-Accounts
  • IRS. "Retirement Plans FAQs Regarding Loans." (April 12, 2013) http://www.irs.gov/Retirement-Plans/Retirement-Plans-FAQs-regarding-Loans
  • IRS. "Retirement Plans for Self-Employed People." (April 12, 2013) http://www.irs.gov/Retirement-Plans/Retirement-Plans-for-Self-Employed-People
  • IRS. "Self-Employed Individuals Tax Center." (April 12, 2013) http://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Self-Employed-Individuals-Tax-Center
  • IRS. "Topic 554 – Self-Employment Tax." (April 12, 2013) http://www.irs.gov/taxtopics/tc554.html
  • Lankford, Kimberly. "How the Self-Employed Can Save for Retirement." Sept. 14, 2012. (April 12, 2013) http://www.kiplinger.com/article/retirement/T047-C001-S001-how-the-self-employed-can-save-for-retirement.html
  • National Association for the Self-Employed. "Self-Employed and the U.S. Economy." (April 12, 2013) http://www.nase.org/Files/Documents/Self-Employed_and_the_US_Economy_Charts_and_Stats.pdf
  • Social Security Administration. "Full Retirement Age: If You Were Born in 1960 or Later." (April 12, 2013) http://www.ssa.gov/retirement/1960.html
  • Social Security Administration. "If You are Self-Employed." 2013. (April 12, 2013) http://www.socialsecurity.gov/pubs/media/pdf/EN-05-10022.pdf
  • Sullivan, Paul. "Save for Retirement in Just 10 Years? It's Doable, But Risky." The New York Times. Nov. 30, 2012. (April 12, 2013) http://www.nytimes.com/2012/12/01/your-money/defined-benefit-plans-allow-fast-retirement-saving-but-with-risks.html?pagewanted=all&_r=0
  • TurboTax. "Top Tax Write-offs for the Self-Employed." (April 12, 2013) http://turbotax.intuit.com/tax-tools/tax-tips/Self-Employment-Taxes/Top-Tax-Write-offs-for-the-Self-Employed-/INF18049.html
  • The Wall Street Journal. "When It's OK to Raid Your 401(k)." MSN Money. June 29, 2011. (April 12, 2013) http://money.msn.com/mutual-fund/when-it-is-ok-to-raid-your-401k-wsj.aspx

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