As an independent professional, you're aware of the many expenses that come with running your business and providing your services. Unfortunately, one area that often slips through the cracks is saving for retirement. Whether you're an independent contractor, commission provider, or booth renter, it's crucial to plan for life after work now. It may seem like a far-off concern, but the truth is, the best day to start saving for your retirement is five, 10, or even 20 years ago. The second-best day is today. If you’re not sure where to start, keep reading for a few recommendations that’ll help stretch your resources into your retirement years.
To whomever needs to hear this: You don’t need an employer to set up a 401(k). Individual 401(k) exists for self-employed people, including independent beauty professionals. Setting up one of these plans means you can contribute as both the employer and the employee. And because these types of accounts can offer a range of investment options (stocks, bonds, mutual funds, and real estate), it’s a strong option for maximizing retirement savings when you’re getting started a little later in the game. Keep in mind though, this route is only for those who are self-employed or own a business with no full-time employees.
You can also go the Roth route. The major difference between a Roth 401(k) and a traditional one is the way they’re taxed. The former is a post-tax retirement plan which means your contributions have already been taxed when they hit your Roth account.
While a 401(k) will allow higher annual contributions, an IRA typically offers more investment options which some people may prefer. Traditional IRAs also offer the key advantage of tax-deferred growth – you won't pay taxes on your contributions until you have to start taking out distributions at age 73. Though you may technically be able to invest more upfront than you would with a typical brokerage account, the annual cap on your contributions is much lower than a 401(k). In 2023, with an IRA you can stash away up to $6,500 annually (for people under 50 years old) compared to $22,500 for a 401(k).
Similar to the 401(k) setup, a Roth IRA allows you to fund your investment with post-tax dollars. You can’t deduct your contributions for tax purposes, but your withdrawals will be tax-free in retirement if you follow the rules.
529 account: Aside from retirement-specific accounts, there are other ways to invest for your future. A 529 plan is a tax-advantaged savings plan designed to help pay for education. This option is commonly used for students, but it can help support early-career endeavors such as beauty school or apprenticeship programs. In this type of account, your money grows on a tax-deferred basis until it is withdrawn. In other words, as long as it’s used for qualified education expenses (like tuition or school supplies, for example), withdrawals aren't subject to state or federal taxes.
Money market savings account: These are interest-bearing accounts you can easily open at most banks and credit unions. They pay competitive rates and support more ways to withdraw money than traditional or high-yield savings accounts.
Index funds: These funds track a specific market index, like the S&P 500, and offer broad market exposure at a low cost, making this option a popular choice for many investors, including independent business owners. Because these funds are passively managed and often easier to maintain, the fees are lower and make this a convenient option for long-term retirement investing.
Getting a retirement account up and running isn’t hard and often only takes a few minutes. However, investing can be a complex process, so it's important to speak with a financial advisor who can offer tailored advice for your specific situation and retirement goals. For example, you may consider investing in a more aggressive plan if you’re younger but may want to lean more conservative if you’re older (psst – you can also take advantage of “catch-up contributions” if you’re over age 50). Whichever path you take, a small step today can help set you up for financial success long after you’ve stepped away from the salon.
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