You quit your job, but you still need a retirement plan

Self-employed business owners who want to save more than $6,000 a year can choose from two retirement savings accounts created for sole proprietors. For 2022, a Simplified Employee Retirement Plan (SEP IRA) allows contributions of up to 25% of income or $61,000 for 2022, while a solo 401(k) allows contributions of up to $20,500 $. With either retirement account, contributions are tax deductible and will reduce your taxable income. The only requirement for the solo 401(k) is an employer identification number, which is easily obtained from the Internal Revenue Service.

If you contributed to an employer-sponsored retirement plan before quitting, you can leave your account where it is (and possibly pay an administrative fee), or you can transfer it to an IRA If you plan to find a other job, you may want to wait and transfer it to your new employer’s pension plan, assuming one is offered. You also have the option of cashing in your 401(k), but you’ll have to pay a 10% tax penalty in addition to paying income tax on the full amount, because the account was funded with pretax dollars. .

Saving for retirement when trying to start a new business and pay your monthly bills can be tricky.

Before opening a self-directed retirement account, Meyer recommends making sure you have enough income to pay monthly bills, including health insurance premiums, and saving at least $1,000 in cash to pay. any unexpected expense without using a credit card. With those basics covered, it’s time to save for retirement, even if it’s just a small amount of money each month.

“Psychologically, it can be difficult to tie up your money in a longer-term investment when you’re starting a new business,” said Kristen Anderson, CEO and co-founder of Catch, an app that helps people save for retirement in Automatically depositing a percentage of their income into an IRA The idea is to recreate the experience users are used to with an employer-sponsored plan without locking them into saving a specific amount each month.

When Keagan Schmidt of Hopkins, Minnesota, quit her job as a financial advisor in October to work for DeeperThanMoney, an online financial education startup that doesn’t offer employee benefits, she and her husband, Derek , have each opened a Roth IRA. The couple, both 27, set up their IRA to get a $500 deposit into their joint checking account at the start of each month. The goal is for everyone to save $6,000 this year.

“Without a 401(k), I resorted to maximizing my Roth IRA, first and foremost,” Ms. Schmidt said.

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