The past year has found many employees who were working for corporations ditching the corporate world and starting their own one person business. Some of the reasons for wanting to start growing a business include more freedom, time with family, and the opportunity to expand your earning potential. These are all valid reasons for wanting to start your own business, but one of the challenges that solopreneurs and one-person business owners face is planning for retirement. Now, single entrepreneurs have several options that were not available in the past.
Retirement Plans for the Self-Employed
One of the scariest parts about starting your own business is that you often lose healthcare benefits and 401(k) retirement plans. These factors are one of the main reasons people choose to stay in the corporate world and are afraid to take the leap. This is especially true if you do not consider yourself a savvy investor and always had someone else to do it for you.
If you never considered yourself to be knowledgeable in the financial realm, it is time that you make an effort to at least learn some of the basics. You do not need to become a financial expert, but you at least need to know the basics of compounding and the types of available investment instruments. This knowledge is especially important now that you will be directing your own retirement plan.
Self-Directed IRA As A One Person Business
Just because you are no longer working for a large company does not mean that you have to forgo the tax advantages of an IRA. You have two different options for establishing a self-directed IRA. The first is a self-directed IRA LLC. An LLC is a limited liability company that is established to run your business. As the manager of the LLC, you have the authority to make investment decisions without having to use a traditional custodian.
IRC section 408 outlines the rules for an individual retirement account. Under this section, only a bank, financial institution, or authorized Trust Company can administer an IRA account. It also establishes that every IRA account must have a custodian or trustee.
In most cases, the bank or financial institution only allows you to invest in traditional instruments such as stocks, mutual funds, and bonds. Now, other options are beginning to open up with companies that offer self-directed IRAs. These companies often allow you to invest in real estate and other non-traditional asset classes.
You still need a custodian for your IRA, but these companies give you more options than traditional banks or financial institutions. The key to choosing the option that is right for you is to do your research. If you are looking for a traditional bank or self-directed custodian, make sure to ask about management fees or limits on assets.
Solo 401(k) For Solopreneurs
Another option for solopreneurs is to open a solo 401(k). In this case, you are the trustee and have the authority to make your own investment decisions. You do not need a custodian to manage the plan, but your business must meet certain requirements. For instance, you must have no full-time employees, and you cannot have a partner or spouse with an interest in the one person business. Other than that, it works much like a traditional 401(k). It falls under the same rules as a traditional 401K and is subject to the same yearly contribution limits. Of course, you will also not be able to have the benefit of matching contributions from your employer.
The IRS now recognizes that solo businesses are an important part of the economy. These options close the gap in benefits and retirement for those who want to pursue the American dream. It is good to know that at least now you have some options. Which choice is right for you depends on how much financial and investment knowledge you already have and how much management you want to do yourself.