Retirement Planning For Independent Contractors

   |   MBO Partners   |   March 24, 2018


As an independent consultant, you love what you do. Reality dictates, however, that you may not want to continue doing it on a full-time basis forever.

With more than 17.8 million fulltime independents working more than 15 hours a week, there is no better time than the present to consider your future. After all, 29% of the full-time independent workforce is represented by Baby Boomers, many of whom have begun to choose full retirement.

Next to carry the torch are Generation X and Millennials, a whopping 63% of the full-time independent workforce. These generations’ hard work and dedication to their craft will also earn them the opportunity to take advantage of a relaxing retirement.

The last thing one would want to encounter, however, is new uncertainties and challenges. This blog takes a look at how independents can appropriately plan (and prepare for) retirement.

Determine Your Retirement Planning Priorities

Before diving in to plan options, it is important to consider the benefits and pros/cons of whichever investment decision will be made.

Commitment. Plans allow (and require) annual contributions, but it is important to understand whether certain plans will allow the contribution amount to be adjusted should your business (and income) shift in either direction.

Timing is Everything. Plans may have specific deadlines (April 15, December 31, etc.) should you wish to make contributions in a particular year.

Tax Benefits. Some plans on the market will allow for larger contributions than others, should you be financially equipped to do so. Most of the time, larger contributions to retirement savings will result in bigger tax breaks.

Additional Costs. While it is your money, there are additional costs associated with each retirement plan option. Hiring an accountant or actuary to tackle the backend and analytical responsibilities tied to a retirement plan may be needed, especially since some plans require your information to be reported to the government. The time/resources needed are certainly worth evaluating before selecting a particular plan.

Retirement Planning Options for the Self-Employed

While employees can rely on corporate 401(k) plans and investment opportunities, independents must be more proactive, and, at times, creative. A number of options remain available for independents to ensure their financial security. These can include:

IRAs – SEP / Simple / Roth Simple: Simple IRAs are retirement plans that allow workers to contribute compensation that is not taxed until it is distributed. Roth: The main differentiator between a Roth IRA and other available retirement options is that tax breaks are granted on money withdrawn from the plan during retirement, as opposed to when the money is deposited. SEP: Simplified employee pensions (SEP) offer a high amount of flexibility with low administration costs. For this planning year, contribution maximums are set at $53,000 or 25% of an individual’s income.
Solo 401(k) For independent consultants who wish to save more money than allowed by a SEP-IRA, solo 401(k) plans provide the opportunity to contribute up to $18,000 in savings ($24,000 if over age 50), PLUS 25% of your compensation. Though they require more paperwork and administration than an SEP-IRA, solo 401(k) plans can also be borrowed from to cover emergency expenses.
Defined Benefit Plan Traditionally, defined benefit plans are geared toward workers in governmental and public entities (and large corporations), and offers an employer/sponsor provided monthly benefit predetermined by a formula based on the worker’s earnings history, tenure of service, and age. Unlike IRAs and 401(k)s, this does not depend on individual investment returns.

It is also important to note that independent consultants who run their business through MBO Partners are entitled to take part in our corporate Solo 401(k) plan. Curious to learn more? We’re glad to discuss.

It Doesn’t Have to End Here

More and more independents continue to change the definition of retirement. While many may no longer be interested in working full-time, they feel driven to be a part of the industries to which they’ve contributed many years of expertise and success.


Disclaimer: Content on MBO Partners blog does not constitute legal or financial advice. 

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