Retirement Options Expand For Self Employed Persons

June 5, 2002
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HOLLAND — Leaving behind the security of a steady job to work for yourself, even if it’s just for an interim period, no longer means having to go without a retirement plan.

The evolution of individual retirement accounts (IRAs) over the years, plus changes within the financial services industry and in federal regulations, have made it much easier and less costly for people who are self-employed to generate a retirement income beyond Social Security.

“It’s been a very big change and a very big improvement,” said Carla Masselink, a senior vice president and certified financial planner for the Holland office of Hilliard Lyons.

“There’s all kinds of opportunities for people to get their own retirement program going.”

Among the options for a sole proprietor to consider:

  • IRAs, which allow for pre-tax contributions of up to $2,000 a year.
  • A Simplified Employee Pension, an IRS-approve program that enables a self-employed person to contribute up to 13.4 percent of his or her net income on a pre-tax basis to a retirement plan.
  • A Profit-Sharing Plan, which allows a person to contribute 15 percent of his or her annual earnings (maximum of $30,000) to a retirement plan.
  • A Money Purchase Pension Plan, which allows a person to contribute 25 percent of his or her earnings annually (maximum of $30,000) to a retirement plan.

Masselink encourages any sole proprietor to seek professional advice before deciding which option to pursue.

From medical professionals to construction workers who’ve started their own one-person businesses, Masselink said she has seen a steady increase in recent years in the number of people who have decided to venture out on their own.

Many eventually decide to start a retirement plan or to build on a 401(k) or other employer-sponsored program they had in a previous job.

“I see a lot of people coming in and they worked for somebody else, and they say, you know, ‘Business is good; I’m going to work for myself instead of somebody else,’” she said.

“But there’s no pension if you’re self-employed.”

Quite often people who become self-employed are unaware of what’s available for them, Masselink said.

In addition to contributing to an IRA, sole proprietors can easily set up a pension plan or 401(k), Masselink said. She encourages self-employed persons to seek professional financial advice if they plan to stay self-employed for an extended period.

The National Association for the Self-Employed, a Washington, D.C., lobbying group, estimates about 16 million people in the United States are self-employed, about half of whom have some form of retirement plan. Citing U.S. Census Bureau statistics, the association says self-employed persons represent about 70 percent of all U.S. businesses.

Ranking high on the association’s agenda is pushing Congress to enact legislation that would make it easier for the self-employed to save for their retirement. That includes raising limits on contributions to IRAs from $2,000 to $5,000.

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