Plans With Self-Employment
Learn about your retirement account options if you are self-employed.
About half of all workers have the opportunity to save for retirement through an employer-based plan. You simply sign up to steer part of your salary each pay period into the plan, reducing the amount of income that is taxed.
In 2015, you can set aside up to $18,000 in your plan plus an additional $6,500 in catch-up contributions for workers age 50 or older by the end of the year.
Increasingly, employers are automatically enrolling employees in 401(k) and similar plans, and many also offer automatic escalation clauses that boost your annual contribution by one or two percentage points each year.
(Employees may opt out of either automatic option.)
Whether your employer signs you up or you have to exert a little effort, don’t pass up this opportunity to save inside a tax shelter. The earlier you start to save, the bigger your future nest egg will be. And it may cost you less than you think.
If you’re in the 25% federal tax bracket, your take-home pay will drop by just $75 for every $100 you put in the plan. (Actually, you’ll lose less than $75 if your contribution also avoids state income tax.)
Many companies offer matching contributions, too. If yours does, try to contribute at least enough to capture the match.
For example, say your company kicks in 50 cents for every dollar you contribute to your 401(k), up to 6% of pay. If you earn $50,000 a year, you need to contribute $3,000 to capture the full $1,500 match from your employer. That’s a guaranteed 50% return on your money.
Contribute less than your 6% share and you’re walking away from free money.
Funding your retirement account is just the first step. The next decision is how to invest that money.
Most employer-based retirement plans offer a menu of investment options, usually mutual funds that invest in a broad range of stocks and bonds.
Many plans offer guidance on how to invest the money to meet your goals, whether it’s in one-on-one counseling sessions, online, or over the phone.
Be sure to review your account from time to time to make sure you’re still on track. Most employer plans provide quarterly investment statements to help you chart your progress.
And you may be able to sign up for automatic rebalancing to bring your investments back in line with your original asset allocation.
Say your original plan called for 70% stocks and 30% bonds, and, due to strong market performance, your account is now split 80% stocks and 20% bonds.
To get back to your original investment allocation, you have to sell investments that have performed better—in this case, stocks—and use the proceeds to buy those that have lagged—in this case, bonds.