We have already discussed some of the options available to home-based professionals for one of the benefits that they often give up when they leave a traditional job. While health insurance is probably the most common benefit received by people in the world of traditional work, retirement plans are a close second. Not every job offers a retirement plan, but many do, and people that are thinking of making the leap to self-employment often wonder how they will plan for their retirement on their own.
Fortunately, there are a few retirement planning options that self-employed people can choose from. It may be tempting to forego retirement planning for a while, especially if your business is still in the early stages where money is likely rather tight. I would caution against putting it off, though, because you could find yourself in a situation where saving for retirement is always at the bottom of your financial to-do list where you never quite get around to doing it.
Home-based professionals can open individual retirement accounts (IRAs). If neither you nor your spouse has any company-sponsored retirement plans then the rules for contributing to your IRA are fairly straightforward. Each year, you can get a tax deduction for contributing a certain amount of money to your IRA. The money that you contribute to the IRA grows tax-free until you begin to draw on it. Once you begin to take distributions from your IRA, those distributions are subject to income tax. The rules are a little more complicated if you or your spouse has another type of retirement plan from a job, such as a pension or a 401k, but it’s still worth learning what the rules are so that you can determine whether you want to open an IRA too.
Roth IRAs are also available to the self-employed, but you do not get to take a tax deduction for your contribution. Why, then, would anyone get a Roth IRA? Well, once the money is in there, it grows tax-free until you begin to draw on it. More importantly, when you do begin to draw on it, those distributions are not taxed as income. Roth IRAs have different income limits and rules than traditional IRAs, so be sure to do your research to see whether one is right for you.
There are a couple of other retirement options that home-based professionals may want to consider in addition to the two mentioned above. Be sure to check back soon for information about these other two retirement planning options, the SEP IRA and the solo 401(k).