Below is a guest post by freelance writer Aimee Claire.
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Image by Steve Snodgrass.
For the self-employed of New Orleans and Louisiana, living very much in the here-and-now of business trends and innovation, it can be easy to forget about retirement; however, all self-employed workers should consider a retirement fund, and it’s never too early to start planning one’s pension.
New Orleans’ Entrepreneurs’ Row is a buzzing hub of startups and fast growing, internationally-recognized companies; even here, however, plans for the future should include the individuals’ own financial security. At Propeller, where lofty ideals and huge commitment focuses on remedying social ills and achieving community-oriented goals, the day-to-day work is in securing a healthy future for New Orleans’ more marginalized sectors of society. But what’s in store for these entrepreneurs’ own futures? Are they putting enough away for their retirement?
Across the United States, millions of self-employed people opt to place part of their savings into Individual Retirement Arrangements (IRAs); individual retirement plans provided by most financial institutions all over the US in order to ensure they will have some financial stability in their golden years. IRAs are preferable to simply leaving money in the bank as they are subject to certain tax advantages.
There are two main kinds of IRA: Traditional and Roth.
Traditional IRAs – the benefits and the drawbacks
With a traditional IRA, money is put aside before tax to accumulate tax-free. The catch is, any funds withdrawn from a traditional IRA will be taxed at your current income tax rate; which can seem worthwhile if you think your retirement tax rate will be lower than the one you have now as a self-employed worker.
Some workers choose to take out SIMPLE IRAs or SEP-IRAs; both are different versions of traditional IRAs. While SIMPLE IRAs are not relevant to self employed individuals, such individuals can also set up and pay into a SEP-IRA (Simplified Employee Pension) retirement plan themselves, just as employers can make retirement plan contributions for their employees.
Roth IRA – a lucrative option?
For those still building up a solid business base and not yet on a high tax level, yet who expect to see their wealth increase later along the line, a Roth IRA might be worth considering – read more on why converting to a Roth IRA might be right for you.
The money in a Roth IRA, while contributed after tax, grows without being subject to tax, and can be withdrawn tax-free – as long as all the rules have been followed. If invested well, this can amount to a tidy sum.
Unlike traditional IRAs, self-employed workers do have to pay tax on Roth IRA contributions; in return, all money saved in the account accumulates tax-free towards your retirement years. This makes particular sense if you anticipate your tax rate to increase from the rate it is currently by the time you retire. They are especially tempting to Louisiana’s younger, low-income workers who can handle the tax deductions now in return for decades of tax-free compounded growth later on.
Not everyone is eligible for a Roth IRA, however: It’s not possible to make Roth IRAs contributions if your income is above a certain level.
All Louisiana entrepreneurs should bear in mind that whether you decide to opt for a traditional IRA or a Roth IRA, this is a choice that should not be made without careful consideration and consultation with your financial advisor.