Whether you are a preschool owner, in-home child care provider, or the business owner of a child care center, we all need to save for retirement. Having a retirement plan in place secures the future of yourself and your loved ones. No one can predict the future, and there is no way to know how soon you will need to retire, if you or your spouse will develop a health issue, or how long retirement will last for you.
What is certain is the fact that you will need to save for retirement, and that everything will cost more in the future. Simply putting money away in a Savings account is not enough, and your money will actually loose value over time. The best way to save for retirement is by investing in mutual funds and index funds by opening retirement investment accounts. And, you will get significant tax advantages by doing so. Here are 3 types of retirement accounts that small businesses and the self-employed qualify for:
A Traditional IRA is a type of individual retirement account in which individuals can make pre-tax contributions and the investments in the account grow tax-deferred. In retirement, the owner pays income tax on withdrawals from a traditional IRA. You can contribute up to $6,000 per year. If you expect your income tax to be lower in retirement, a traditional IRA may be the right choice. You can open a traditional IRA on investment websites such as Vanguard or Fidelity.
A Roth IRA is a type of individual retirement account in which individuals can make contributions after the money is taxed and the investments in the account grow tax-free. In retirement, the owner does not pay income tax on withdrawals from a Roth IRA. You can contribute up to $6,000 per year. If you expect your income tax to be higher in retirement, a Roth IRA may be the right choice.
*Note: You can contribute to both a Traditional and a Roth IRA in the same tax year, but the total amount cannot be over $6,000. (For example, you can put $3,000 in a Traditional IRA and $3,000 in a Roth IRA, since the total would be $6,000. But, you cannot put $6,000 in a Traditional and $6,000 in a Roth in the same tax year.)
Simplified Employee Pension (SEP IRA)
A SEP IRA is an attractive option for many business owners because it does not come with many of the start-up and operating costs of most conventional employer-sponsored retirement plans. Many employers also set up a SEP IRA to contribute to their own retirement at higher levels than a traditional IRA allows. For a self-employed individual, contributions are limited to 25% of your net earnings from self-employment.
Small business owners favor SEP IRAs because of eligibility requirements for contributors, including a minimum age of 21, at least three years of employment, and a $650 compensation minimum. In addition, a SEP IRA allows employers to skip contributions during years when business is down.
SEP IRAs are treated like traditional IRAs for tax purposes and allow the same investment options. The same transfer and rollover rules that apply to traditional IRAs also apply to SEP IRAs. When an employer makes contributions to SEP IRA accounts, it receives a tax deduction for the amount contributed. Additionally, the business is not locked in to an annual contribution—decisions about whether to contribute and how much can change each year.
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