Many investment options, such as 401(k)s and IRAs, are offered through an employer. These accounts can generally be funded with money from your earnings before those earnings get taxed. If you are self-employed, many of the same investment options are available to you. You just have to handle the tax aspect yourself.
As a self-employed person, you are probably used to handling many of the aspects of a business yourself, and investment options prove no exception. Instead of setting up an investment through your business, you must set up your savings directly through a financial institution. Investment options available for the self-employed that mirror the standard retirement accounts offered through larger companies include self-employed 401(k)s, simplified employee pension (SEP) plans and Roth IRAs.
Two mains differences exist between the types of investment accounts available to the self-employed. One pace where the plans diverge is the contribution limits, which vary widely. As of the time of publication, an individual may contribute 20 percent of his income, up to a max of $49,000 per year to a SEP up to $16,500 per year to a self-employed 401(k), and up to only $5000 to a Roth IRA. SEP and 401(k) savings may also be declared as tax-free income on your tax return, while you must pay taxes on money contributed to a Roth IRA.
As a self-employed business owner, you should be paying in quarterly income taxes to the IRS. The amount of quarterly taxes that you pay in is generally based on your tax return for the previous year. Though investing money in a 401(k) or SEP will counteract some of the taxes you owe, you should still pay in the full amount of your quarterly taxes if you can afford to do so. When you declare your investments on your tax return, you should get the tax paid on the investments back.
Making Contributions and Declaring Investments
Although self-employed investment options may be set up directly with your financial institution, instead of through your company, you can still have the ease of direct deposits into the account. Many financial institutions offer the option of setting up automatic deposits in which funds are transferred out of a personal account, such as a checking account, and into the investment account. You can set this up as a weekly, bi-weekly or monthly investment.