Self-employed Americans are dragging their heels saving for retirement.
Fifty-nine percent aren’t making regular contributions to their retirement savings, according to a 2015 survey by TD Ameritrade. Unpredictable income and too many personal expenses were the main barriers cited by respondents. Only 28 percent reported having received professional financial advice in the past 12 months.
Fortunately, there’s still time for some self-employed individuals and small business owners to fix last year’s retirement-planning oversights. Those who extended the filing deadline for their 2015 tax returns to October 15 have until then to establish and fund a Simplified Employee Pension IRA. Contribution limits for a SEP IRA in 2015 and 2016 are 25 percent of an employee’s compensation or $53,000—whichever is lower.
Self-employed individuals and small business owners have until December 31 to set up a solo 401(k) for 2016. They can contribute a maximum salary deferral of $18,000 (plus a $6,000 catch-up contribution if age 50 or older). They can also contribute of up to 25 percent of their net earnings from self-employment. The total contribution, excluding a catch-up contribution, can’t exceed $53,000.
Individuals with solo 401(k) plans are doing a better job funding them than those with corporate 401(k) plans. Ascensus, the nation’s leading retirement services provider, calculates that as of July 31, account holders’ assets averaged $155,905 for the solo 401(k) plans it services and $52,178 for its corporate 401(k) plans. As of December 31, 2007, account holders’ assets averaged $77,482 for solo 401(k) plans and $34,018 for corporate 401(k) plans.
Ascensus is seeing some increased interest in new plan activity for solo 401(k)s and SEPs, says Howard Insley, senior vice president of retirement operations at Ascensus. Advisory firms are also likely to move these non-Erisa plans to their internal platforms, he says, given the Department of Labor’s conflicted advice rule
Peter Manning, president of Financial Planning at Summit Financial Strategies in Burlington, Mass., says he expects the need for individual retirement plans to increase “as more people do consulting or fend for themselves in the business world.”
Surveys show millennials have significant interest in working for themselves. Some will have no choice but to cobble together their own retirement plans in a rising “gig economy” fueled by short-term, part-time work. Older workers are also carving out more self-employment opportunities to help fund retirement.
Manning finds people are often surprised to learn that 401(k) plans are available to the self-employed and small business owners. His clients who are consultants often start with a SEP IRA and then establish a solo 401(k) when they form an S-corp. Setting up a SEP IRA doesn’t involve administrative costs, he says, but solo 401(k) plans often cost $1,000 to $2,000 to set up and have an annual administrative fee of a couple hundred dollars.
Neither SEP IRAs nor solo 401(k) plans sport minimum funding requirements. Manning sees this flexibility as a real plus for self-employed individuals and small business owners. “These are not 9-to-5 people collecting a paycheck,” he says. “Retirement planning allows them to smooth out a good year and bad year.”