How the self-employed can save on taxes and help their retirement


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For the self-employed, time is of the essence in order to reap the tax advantages of saving for retirement.

There are a lot of you out there. According to a Pew Research Center report, the number of self-employed workers in the United States increased to 14.9 million in the second quarter of 2021, up from 12.7 million the previous year.

According to the researchers, a portion of that increase was caused by an increase in the number of workers who lost their jobs and turned to entrepreneurship, or those who left the workforce during the pandemic to care for loved ones and returned with contract positions.

Saving for retirement is one of the most difficult things to do when you’re self-employed or manage your own business.

However, depending on the vehicle, there may be tax advantages to saving for retirement, and for IRAs, and SEP-IRAs, you can still make contributions for the previous year before tax day.

Traditional and Roth IRAs

In general, the yearly IRA contribution limit in 2021 and 2022 is $6,000 ($7,000 if you are 50 or older at the end of 2021). Contributions for 2021 can be made to a regular or Roth IRA until the tax-filing deadline, which is April 18 this year, but they must be classified as contributions for the previous year.

The IRA contribution limits apply to both standard and Roth IRA contributions combined. This means that if you have a Roth IRA and a standard IRA, you cannot contribute to both. Furthermore, there is no maximum age for making IRA contributions. ‘Very few Americans are appropriately prepared for retirement,’ according to one expert.

Contributions to a typical IRA account are made pre-tax, which means you are deferring paying taxes on a portion of your income until you remove the funds. Because you are depositing money before taxes, you will receive a tax deduction right away. When you opt to withdraw the funds (ideally in retirement), you will be subject to income tax.

SEP-IRAs

Entrepreneurs may choose a SEP-IRA, a tax-deductible retirement plan that is suitable if you are the sole employee of the company. For 2021 tax returns, you can donate up to 25% of your salary, or $58,000. Contributions for a year must be deposited before the due date (including extensions) for filing your federal income tax return for the year. If you obtain an extension to file your tax return, you must deposit the contribution by the end of the extension period, regardless of when you actually completed the return.

The 2022 SEP-IRA contribution ceiling is $61,000 for the coming year. Your entire donation will be tax-deductible.

Make savings for 2022 automatic.

If you’re self-employed this year and don’t want to stress about a last-minute rush to fill your retirement account next April, set up an automatic transfer from your checking account into an IRA or HSA account each month to contribute to your 2022 tax year. Even a monthly investment of $100 in a retirement account helps to establish a routine. It is feasible to find accounts that do not require a minimum investment. Ideally, you should save at least 15% of your gross income for retirement. That being stated, start with whatever you can fit into your budget.

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