- More people are working side jobs or starting their own businesses
- Independent income savings vehicles can broaden your investment options
- Small business retirement plans may offer tax savings and higher contribution rates
Have you ever considered turning a skill or hobby into a side business in order to earn extra income? If so, you’re not alone. About 53 million Americans — or one-third of all workers — are earning income outside of a traditional 9–5 job, according to the U.S. Bureau of Labor Statistics.
A growing number of people over 50 are also “retiring” from unsatisfying careers to strike out on their own as consultants or entrepreneurs. People aged 55-64 founded 25.8% of new ventures in 2014, up from 14.8% in 1996, according to the 2015 Kauffman Index of Startup Activity.
For many, peak earning and investing years occur between age 50 and retirement. And an increasing number of people in their 50s and 60s are consulting or starting a side business with the sole purpose of saving more money for retirement. Investing outside of the plan you have with your traditional employer can open up a wider array of investment options, and can include tax benefits as well.
“Independent contractors and business owners may qualify for a current year tax deduction through deferring a significant portion of their income for retirement,” says Amy Diesen, Vice President of Wealth Management Solutions at Ameriprise Financial.
Your Ameriprise advisor can help you evaluate your options and set up the plan that is right for you.
“While other providers may only offer their own funds, at Ameriprise you have access to a full array of options,” Diesen says. “We believe in empowering clients by making choices available.”
A good solution for those who have a side business with employees, the SIMPLE (Savings Incentive Match Plan for Employees) IRA lives up to its name — the administration is less complex and less costly than other self-employed investing vehicles.
“It makes a lot of sense for those with eligible employees because it has a smaller employer contribution — up to 3% of annual salary,” Diesen says. Eligible employees are able to defer up to $12,500 into the plan ($15,500 if they are 50 or older).
One caveat: You can’t make salary deferral contributions to a SIMPLE IRA if you’re maxing out salary deferral contributions through another employer retirement plan (unless you’re contributing to a 457 plan, which is typically used by government or non-profit organizations).
“Independent contractors and business owners may have the ability to reduce their taxes through deferring a significant portion of their income for retirement.”
These plans are designed for sole proprietors without employees, with the exception of a spouse, who can contribute if they are also employed by the business.
Solo 401(k) contribution limits are comparable to the employer-based version, with pretax or Roth IRA deferrals up to $18,000 per year ($24,000 if you are 50 or older). Salary deferral contributions made to another employer plan (other than a 457) must be taken into account when figuring this limit.
You can also make employer profit-sharing contributions of up to 25% of your income, with an overall limit of $54,000 ($60,000 if you are 50 or older). Profit-sharing contributions are generally not impacted by contributions made to other plans.
A SEP (Simplified Employee Pension) IRA is often the easiest, least costly plan for full-time entrepreneurs.
It follows the same investment, distribution and rollover rules as traditional IRAs. You can contribute 25% of your compensation — not to exceed $54,000 — into a SEP IRA.
“The SEP is primarily for the independent business owner,” Diesen says. “It is a completely employer-funded plan, so you generally have to contribute the same percentage for eligible employees as you do for yourself.”
The SEP IRA offers an additional benefit for those who are still employed by another company while running their own business: You can contribute to a SEP even if you are maxing out retirement contributions with your employer. The contribution limit to the SEP IRA is generally considered separate from your employer’s plan.
The right advice
While a foray into investing may seem intimidating at first, your advisor can provide the type of in-depth, holistic advice that most company retirement plans don’t even begin to offer.
“They can help you decide what type of retirement plan works for your needs as well as what type of investing to do within that plan,” Diesen says. “It’s all about having choices and options. A one-size-fits-all plan doesn’t work for everyone — especially those who are working for themselves.”