If you are self-employed or even if you are working for someone else
but have a side business, you may be wondering what is the best type
of retirement plan for me?
That is what we are going to talk about in today's video.
What is the best type of retirement plan if you are self-employed?
We are going to go over a few different plans and decide which one
will be best for you.
All right, what is the best type of retirement plan if you are
self-employed?
I'm going to cover six different retirement plans today.
The first three you may have heard of, we're going to talk about a
taxable brokerage account and then a Roth IRA and then a traditional
ira.
And then the next three you may not have heard of.
We are going to talk about a solo 401K or a Roth solo 401k.
And then we are going to talk about a simple IRA and then a SEP ira.
And then I'm going to give you a way to help you decide which one
would be best for you.
All right, let's first talk about the taxable brokerage account.
I really like this account because it is so flexible.
Essentially, a taxable brokerage account allows individuals like you
to set up an account where you can invest your money in the stock
market.
You can buy stocks, bonds, mutual funds, et cetera.
And here are some of the benefits of a taxable brokerage account.
The first one is flexibility.
You can contribute as much money as you want to.
There are no limits and you do not have to be under a certain income
to contribute to a brokerage account.
Also, you can withdraw the money whenever you want to.
There are no penalties for withdrawing before age 59 and a half like a
lot of other retirement accounts like a 401K or a traditional ira.
This makes taxable brokerage accounts really nice for even short-term
investments plus the long-term investments.
Brokerage accounts also have tax efficiency with them.
Yes, you will pay taxes when you withdraw money from your taxable
brokerage account, but if you hold that money for at least a year,
you're going to pay what is called a long-term capital gains tax rate.
And those tax rates are either 0%, 15% or 20% depending on your income
level.
So you could be paying 0% in federal income taxes.
Not only that, you can offset some of your capital gains by doing what
is called tax loss harvesting.
So you could sell some of your investments at a loss, which may not
sound too smart, but that would lower your tax liability.
You would be paying less in taxes.
And I will go into more detail about tax loss harvesting in another
video, but just keep in mind that is an option with a taxable
brokerage account.
Plus you have a lot of options with a brokerage account.
You can invest in a lot of different individual stocks.
There are mutual funds and that includes index funds.
There are ETFs, there are REITs that you can invest in all sorts of
options and also bonds.
This gives you a lot of control over your portfolio over what you are
investing in.
And unlike retirement accounts, it has an unlimited contribution
limit.
You can contribute as much money as you want to to a tax flow
brokerage account.
If you are a high income earner, this is going to be really beneficial
because you can get a lot of money invested in the stock market.
A brokerage account also has better liquidity.
Like I mentioned you can pull money out whenever you want to.
You do not have to wait until age 59 and a half, and you will not be
penalized for pulling your money out before age 59 and a half.
Unlike with those retirement accounts such as the 401k and the
traditional ira, you can access your money anytime you want to.
Another great benefit of a brokerage account is that you can take out
a margin loan against your brokerage account.
This means you can borrow against your investments.
Essentially, you can leave your money invested and borrow money, take
a loan out against your investments, and you could live off of that
money.
And yes, you would pay interest, but there are some brokers that have
a really low interest rate on their margin loans, so this could be a
really great option for you.
And this is only available with a brokerage account.
You cannot do this with retirement accounts like a 401K or an ira.
And of course there are some requirements that go along with a margin
loan.
If you're looking for more information about this, I do have another
video that I've created.
I will leave a link to that above and you can check it out later on.
But this is just one more benefit of having a brokerage account in the
fact that you can contribute as much as you want to.
You can pull money out whenever you want to.
It has that tax efficiency, it has great liquidity and lots of
investment options.
Just keep in mind that you will still be paying taxes on any gains
that you have in the brokerage account.
And I want to share a personal experience with you about using a
brokerage account.
I set up one a few years ago and I started investing inside of that
brokerage account and later on I decided to purchase my fourth real
estate property.
And in order to do that, I needed to have a down payment of course.
And what I did was I took some of the money from my tax flow brokerage
account, I cashed it out and I put that toward my down payment for my
fourth property.
I just wanted to share that example with you to show that it does have
a lot of flexibility so you can switch in investments from your
brokerage to another investment type.
All right.
The second retirement account that can be useful for the self-employed
is a Roth ira, and this is not limited to just those that are
self-employed.
If you have a nine to five, you can also set up a Roth ira, and this
is an individual retirement account, hence ira.
You can set this up through any traditional broker.
I like using Vanguard.
Fidelity is another popular one, and the money that you put into a
Roth ira, it needs to be taxable money, so it has to be money that you
earned that year, and it does have a limit.
You can only invest up to $6,500 for the year 2023, and that is if you
are under the age of 50.
If you are over 50, you can invest up to $7,500 per year.
You can start withdrawing your earnings without a penalty at age 59
and a half, and both your contributions and your earnings are growing
tax free in a Roth ira, you will pay taxes on that money upfront
before you put it in and then it grows tax free.
When you pull that money out, you do not have to pay any taxes.
If you want to withdraw your earnings before age 59 and a half, you
will pay a 10% penalty.
But the nice thing with a Roth IRA is that you can pull out your
contributions at any time without any penalty, and of course, without
paying tax because you already paid taxes and the experience that I
shared earlier about pulling money out of my brokerage account to
purchase my fourth property, I also pulled some contribution money
that I had in my Roth ira, pulled that out and put that toward my down
payment as well.
And there are some income limits to contributing to a Roth ira.
If you are single, you need to be making under 153,000 per year.
And if you are married, it needs to be less than 228,000 per year.
So while this has a lower contribution limit at only $6,500, it is
still a nice way to invest your money for retirement because it is
growing tax free.
And then let's move to the traditional ira, the third account.
This is similar to a Roth in the fact that you can only contribute
$6,500 per year and you will also have a 10% penalty for withdrawing
it before age 59 and a half.
That goes for contributions and earnings.
You cannot pull out your contributions early from a traditional IRA
without having that penalty.
And then unlike the Roth ira, you are going to pay taxes when you pull
the money out.
So it gives you a tax break when you're putting money into the
account, but later when you want to pull that money out, you are going
to pay taxes on it.
Also, unlike the Roth, a traditional IRA does not have any income
limits, so you can make as much money as you want to and still
contribute to a traditional ira.
And another nice thing is if you want to switch over your traditional
IRA to a Roth ira, you can do that.
And I have another video where I break down how to do that.
I will leave a link above.
I personally have a Roth IRA and a traditional IRA because when I had
a nine to five job, I had a 401k.
So I ended up rolling my 401k into a traditional ira.
Okay, let's move to account number four, which is a solo 401K or a
Roth solo 401k.
This type of account is only for business owners and you cannot
contribute to a solo 401K if you have employees, but you can use the
plan for you and your spouse.
The contribution limit for 2023 is $66,000, so quite a bit higher than
the Roth or traditional ira.
And you can make contributions as the employer and as the employee.
And there are some other regulations with this, but I'm not going to
go into that much detail in this video.
But you can start withdrawing the money at age 59 and a half without
penalty, and you must start withdrawing the money at age 72 for the
solo 401k, but not for the Roth Solo 401k.
And I didn't mention this before, but going back to the traditional
ira, you also have to start withdrawing your money at age 72.
You cannot just leave that money in there.
With a Roth ira, you can leave that money in there and just let it
continue to grow and leave it to your heirs.
Okay, let's move to the fifth account, which is a simple ira and
simple stands for savings incentive match plan.
This is also only for small business owners and you cannot have more
than a hundred employees and you can make contributions as the
employer and the employee.
The contribution limits for 2023 is $15,500.
You can also start withdrawing this money at age 59 and a half, and
you have to withdraw it starting at age 72.
You can combine this plan with a Roth IRA or with a traditional ira.
And when you are contributing to this plan for your employees, they
are fully vested as soon as you start contributing money for them, and
you are required by law to match your employee contributions.
So that is the simple ira.
Let's move to the SEP ira.
And SEP stands for Simplified Employee Pension.
This is best for the self employed that have very few employees or no
employees.
The contributions are made from the company only.
This also can be combined with a Roth IRA or a traditional ira, and
you must contribute to this plan for your employees based on who the
IRS deems eligible.
And this must be an equal compensation to your own contributions.
And the contributions are dependent upon your net earnings for your
business.
If you had a loss for your business, you would not be able to
contribute to your own plan, but you could contribute to your
employee's plans.
And the maximum you can contribute in 2023 is $66,000.
This also reduces your taxable income because you were going to pay
taxes later when you are withdrawing the money.
And that also goes for the simple ira, and there is no Roth version
available for the SEP ira.
Also, you do not have to contribute to committing every single year.
You can start withdraw at age 59 and a half, and you have to start
withdraw at age 72.
So those are the six retirement accounts that could be beneficial for
the self-employed.
Comment below and tell me if you already have one of these accounts
set up or which one you are going to set up.
And if you want more help with understanding all of the different
types of accounts and getting your money invested, I have a free
masterclass.
I will leave a link below in the description and you can watch that
and get more information about how to pick the best plan for you and
even pick the best types of investments for you.
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Thanks so much for watching.
I'll see you in the next video.