Ain't No Rest for the Wicked
Retirement for the Massage Self-employed
You went to massage school, graduated, worked at few massage clinics, took the plunge and decided to open up your own business. Welcome fellow entrepreneur! Here you are, the dream we all talked about since massage school.
Ok maybe it didn’t exactly happen that way, but none the less you have found yourself running your own business. Things are moving along, you’re thinking about employees, maybe taking more time off, and even thinking about your future. Ah the future, what does that hold? Social security? Not likely to be enough. Retirement? That’s what you get working for an employer, right? All too many massage therapists that own their own business (as well as many small business owners in general) don’t think far enough ahead to think about retirement. We can work forever right? Yes, I know we don’t really believe that, but sadly many massage therapists leave the field because they don’t prepare for the future.
When it comes down to it, not many talk about retirement. That’s for old people. Interestingly enough, the older I get the more I wished someone had emphasized planning for retirement when I was younger. The earlier you start the better it will be. Saying this, it’s never too late to start saving for retirement. Wether you work for yourself or not, you absolutely should have some form of a retirement fund set up!
How does retirement work? The typical way a retirement fund works is when you work for a company and they offer a 401(k). What happens with a 401K? Well how much you contribute your employer will contribute between 3% to 6% of the persons pay. The most common match is 50 cents on the dollar up to 6% of the employees pay. Others will match dollar for dollar up to 3%. Whatever your employer chooses to do, they contribute essentially free money to you! Sounds amazing right? What happens when you own your own business? You are your own employer. Are you going to match yourself? That’s not free money anymore. Sadly yes, when you are self employed you have to contribute your own hard-earned cash into a retirement fund all on your own.
Now, what are your options? This is where some of the fun comes into play. You can actually find some options where your retirement fund can act as a tax shelter, almost. Key word almost, don’t go thinking this is money that will never be taxed. There are two things certain in this world, one is we will die eventually and the other is we will pay taxes. Sorry to be a Debbie downer but it’s not all bad I promise. Let’s look into our options.
Here’s the list of options! (Have I mentioned I like options?)
· Traditional IRA
· Roth IRA
· SEP IRA
· Solo 401K
· Solo Roth 401K
· Roth IRA
Let’s break each one of these down:
IRA stands for individual retirement account. Back in the day this was just a plain IRA, no other IRAs were around, which is how it gained its term “traditional” IRA. There are a few other types of IRAs such as Roth and SEP which we will get into a little bit later. The main benefit of a traditional IRA is to reduce your taxable income. Yay! You can contribute up to $6,000 a year that is deducted from your yearly income. Just to say an example, if you are in a 40% tax bracket you are saving $2,400 in taxes that you DON’T have to pay! Another added benefit is, typically you have to pay taxes on stock income and on dividend payouts. Not if you hold stock in your traditional IRA account. Additionally, when you turn 50 you can start to contribute more than $6,000 a year, which changes every so often. So, what are the draw backs? Well the shelter doesn’t last as long as forever (but it sure feels good while it lasts). Once you turn 59.5 (that point 5 always cracks me up) you are able to withdrawal from your traditional IRA with no penalties, but you will have to pay taxes on it. After you hit 71.5 (there’s that point 5 again), the government steps in and says it’s time and will start requiring you to make annual distributions (payments to yourself).
The Roth IRA was established in 1997 by the former Delaware Senator, William Roth. It is fairly similar to a traditional IRA except opposite. Roth IRA contributions are after they have been taxed so once you hit retirement and can withdrawal the money, the taxes have already been taken out so you can enjoy your money as is. Another small drawback is there is a cap on income of about $124,000 for 2020, which this number changes each year. To counter that drawback, since the money you put in has already been taxed, you can withdrawal your contributions whenever you want, without owing any penalties or taxes, no matter how long your account has been open! Just remember the IRS will want a piece of the investment returns you earn on the money in your account (the interest you make with your money) in the form of income taxes and possibly an early withdrawal penalty (of course there are some exceptions to this rule but for keeping things simple we won’t dive into that now).
SEP stands for Simplified Employee Pension and is adopted by business owners to provide retirement benefits for themselves and even their employees. With this option you are allowed to contribute up to 25% of your net income with up to the maximum allowed being $57,000 a year. Similar to the traditional IRA, the contributions are pre-tax and are only able to be withdrawn penalty free at 59.5, to which you will have to pay income tax once withdrawn.
I’ve added this portion as there is an option for self-employed. There is a 401(k) and a Roth 401(k) and they are set up similar to the IRAs tax wise. These are typically offered at a place of employment and are matched by the company. So that’s free money. If you work for yourself, you have the option of a solo 401(k) or a Roth solo 401(k). Roth being the one that, you guessed it, taxes are taken before you contribute. If you are self-employed (have an employer identification number) and have no other full-time employees (other than your spouse) you should be able to qualify for a Solo 401(k) or Roth Solo 401(k).
An HSA is NOT a retirement option but can be an awesome addition if you are able to qualify for one. HSA stands for Health Savings Account. The cool thing about an HSA is they combine all the great benefits of a tradition IRA and Roth IRA where you get pre-tax contributions, tax-free earnings and tax-free withdrawal! An HSA is specifically intended for saving money for health-related expenses, so any withdrawal needs to be a health-related expense. Which of course we all have those! Acupuncture, massage, contacts, dentist appointments, the list goes on. The maximum for the year of contributions allowed is currently $3,500 in 2020. If you just so happen to never NEED this money, or have leftovers once you reach 65, you are then allowed to withdrawal the money for whatever reason! As you can see it can be a nice little benefit to add on. Unfortunately, not everyone is able to qualify for an HSA, you have to have a health insurance plan that supports it. So, if you are searching for insurance plans, check and see if HSA is an option!
One thing to keep in mind for all of these options is that the terms can change per year. Meaning how much you can contribute and the age where withdrawals are possible, so it would be a good idea to research these avenues for yourself. Everyone’s situation is different, and it is best to seek the advice of a financial advisor and/or a tax professional to help you decide what is most beneficial for you! While owning your own business can have a lot of uncertainty, don’t let one of those be your future.