Retirement savings for the self-employed

A number of people have asked me how I’m saving for retirement now that I’m self-employed, and several more asked yesterday when I mentioned that I was signing up for a SEP-IRA. In order to clarify everything, here’s exactly how I’m saving for retirement as a self-employed writer.

For comparison’s sake, my previous retirement savings were exclusively in 403(b) and 401(k) plans. Even though I planned to open a Roth IRA in 2007 (and even went so far as to fill out the paperwork), I eventually elected not to do it, primarily because of the costs associated with purchasing a house in 2007 and the fact that I was already rolling about 20% into my retirement plan. In fact, my savings in there is quite a bit above what’s considered “normal” for a 29 year old - I have substantially more than a year’s worth of my old salary in there, and it’ll just do nothing but grow over the next 30 years.

My current self-employement retirement planning is handled exclusively through Vanguard. I’ve invested with them in the past, I feel wholly comfortable with the way they do business, I agree strongly with their company’s investing philosophy, and I want to put all of my retirement into index funds, which is what Vanguard specializes in.

So what did I do? Almost as soon as I moved to self-employment, I opened up a Vanguard Roth IRA. A Roth IRA is a retirement account that almost anyone can set up (well, anyone with a Modified Adjusted Gross Income below $114,000 for an individual or $166,000 in a married couple). Each year, you can contribute up to $5,000 to the Roth IRA out of your after-tax money - it isn’t pulled straight out of your paycheck like a 401(k) is. However, once it’s in the account, it’s sweet - as long as you follow the very simple withdrawal rules (basically, no withdrawing until the account is more than 5 years old or you’re over 59 1/2 years of age), you can withdraw the earnings tax free - you don’t have to pay income tax on any earnings in the account (you can also withdraw your contributions at any time without penalty). For a lot more detail, read up on Roth IRAs at Wikipedia.

So, basically, each month I put a few hundred dollars into my Roth IRA at Vanguard - just enough so that after the year’s up, I’ll have contributed my total $5,000 (my wife is considering opening one as well, so that will make our combined contribution $10,000 for the year if she does that). Ideally, then, I’ll contribute $5,000 each year over the next thirty years into this account, taking me right up to retirement age. If I do that, and it earns even just 6% per year, that’s $395,290 I have access to at age 59 1/2, all of it tax free. If I get an 8% return on it, that’s $566,416 - tax free. That’ll certainly help with retirement.

What about the SEP-IRA? So, as I mentioned yesterday, I’m setting up a SEP-IRA through Vanguard as well, mostly because I wanted to contribute more towards retirement than the $5,000 a Roth IRA allows for me. A SEP-IRA allows a self-employed individual to contribute up to 20% of their profits to the SEP-IRA. I’m allowed to invest up to (approximately) 20% of my self-employment income into this plan (though I’m not going to be putting in quite that much). This plan is tax-deferred, meaning that I put in money before paying taxes on it and then pay income tax on everything I take out later on. For the purposes of most people, it’s like a 401(k) for the self-employed, except that you don’t get employer matches.

Right now, I’m contributing roughly 5% of my income each month to this plan - that’s in addition to the Roth IRA, but way under my contribution limits for the year.

How did I invest? In both cases, I set up a regular investing schedule and bought into the Vanguard STAR fund because I didn’t want to put in the $3,000 minimum for other funds. I’ll sell the STAR shares when it reaches $3,000 and move it to another fund. Eventually, I plan on having all of it split among a few funds just to ensure diversity - I want some international stocks, some domestic stocks, etc.

For most self-employed people, particularly those under the cap for a Roth IRA, this is a solid path to follow.


The Simple Dollar chronicles a man's road to recovery from "total financial meltdown." As author Trent Hamm puts it, "The Simple Dollar is a blog for those of us who need both cents and sense: people fighting debt and bad spending habits while building a financially secure future and still affording a latte or two." We'll post a couple of entries a week, but you can check out his writing daily at www.thesimpledollar.com
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YourIRA
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YourIRA 05/01/08 - 01:41 pm
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Regarding the article ...

Regarding the article ... "Retirement savings for the self-employed" Posted by SimpleDollar on April 29, 2008 - 9:29 AM I must say that I admire the writer for taking the time to investigate what's out there but unfortunately he does sound a little like a "Vanguard" Mutual Funds commercial and he overlooked a very valuable option, the Individual 401(k). An Individual 401(k) can accept both ROTH and Traditional contribution dollars and if structured properly may include his wife's contributions(of course no comingling of funds). Here are just a few of the advantages of the Individual 401(k). 1. It can accomodate both ROTH and Traditional contributions. You get to decide how many dollars to place in each one subject to maximum contribution limits. 2. A wife's contributions can be in the same Individual 401(k) Plan thus both husband and wife can invest in the same investment (again only if properly structured). 3. There is NO income earning's ceiling for an Individual 401(k) ROTH thus you can contribute up to $49,500 annually as can your spouse. Yes, more than a SEP IRA. 4. An Individual 401(k) does not need an IRA Custodian (a big reason why they don't tell you about it) thus you can eliminate IRA Custodial fees. A SEP IRA requires an IRA Custodian. 5. An Individual 401(k) gives you Check Book Control. You spot an investment you simply write a check, for example real estate and real estate related products; Tax Lien Certificates, discounted Notes,loans made in the form of mortgages etc. With an Individual 401(k)a Buy Direction Letter and IRA Funding Form is not demanded by the IRA Custodian. These seemingly harmless pieces of paper have killed many a deal. With an Individual 401(k) you have immediacy. Try standing on the steps of a Courthouse and get the winning bid on a foreclosure only to inform the Court Clerk you need a week or two to process your Buy Direction Letter and IRA Funding Form through your IRA or SEP Custodian. 6. An Individual 401(k) allows you to manage and be paid for repairs etc. performed for the Individual 401(k)held property. Not true of a Self-Directed IRA. I could go on but hopefully the message is clear. Get all of the facts and options before you make your move and understand that Wall Street's agents, Stock Brokers, Financial Planners and Mutual Fund Salespeople typically won't tell the whole story. Why should they, currently they control 97% of the estimated four trillion dollars in IRAs held by 45,000,000 Americans today. Thomas Phelan President IRA Choices www.IRAChoices.com

freds12
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freds12 07/30/09 - 04:18 pm
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Every individual want to be

Every individual want to be a self made person. For this they must have to be effective & smart woking. Stay at home mom jobs is also a part of it through which a person can earn smartly within less time.

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