Mind Your Own Business

The reasons for starting your own business are as varied as the types of businesses operating. Maybe you got sick of working for the man and decided to contract instead of 9 to 5. Maybe you came up with the best fried tomato sandwich ever and joined the burgeoning cartopia movement. Maybe you were laid off and your only choice was to hang your own shingle.

Whatever the case may be — innovation, necessity, passion — the rewards of choosing yourself over a W-2 paycheck are tremendous. That said, the punishments can be tremendous as well, which will give you years of grindstone tales for your grandchildren. When you are in that future describing your trials and tribulations you will hopefully have a nice nest of eggs that will give your tales a bit more legitimacy. No amount of bootstrap will inspire a future teenager if you are forced to live in a basement for lack of retirement planning.

So start saving. There are several retirement vehicles to choose from based on several variables including your income and whether or not you have any employees. Assuming you have no employees, your deciding factor is usually how much you have left over that you would like to sock away in a tax-deferred account. Lets break the left-overs in the following categories: some, more than some, lots more than some.

If you have some money to save, you can use a traditional individual retirement account (IRA). It isn’t a retirement plan per say, but a retirement savings account that lets you put pre-tax money away ($5000 for 2012 if you are under 50) to invest which will grow tax deferred until you need it when you retire. You could also consider a Roth IRA.

If you have more than some, you may want to consider a retirement plan such as a SIMPLE IRA or a SEP IRA. (yes, they are acronyms, not shouts) Both allow you to contribute a considerable amount more than a traditional IRA, and each are low-cost and easy to administer. Still assuming you have no employees, a SEP will allow you to contribute 20% of your net income. A SIMPLE will allow you to contribute $11,500 a year. Both have strings attached, especially if you begin to hire employees, but there is no such thing as a tax-deferred account that doesn’t have ifs ands and buts. It is the IRS after all.

If you have lots more than some, consider an individual 401(k). Also known as solo-k plans, these accounts allow you to sock away $17,000 plus an additional 20% profit sharing contribution, the maximum of the two totalling up to $50,000. That will feather a nest much faster than $5000 a year you can put into an IRA.

All four types of accounts can be opened at discount brokerages such as Scottrade, Schwab or E*TRADE. Each brokerage has their own internal rules regarding yearly fees and level of support, so it is best to shop around.

You certainly don’t have to use a retirement account to save, there are other types of accounts you can invest your money in. A retirement account has a few features beyond tax deferral that make them attractive, namely, you are punished if you take money out early, which is a great incentive not to touch your retirement savings. You aren’t locked-in-the-closet-with-no-dinner punished, but penalized on withdrawals.

If you are still in the weeds minding your own business, don’t give up. But as soon as you possibly can, make it a point to mind your future as well.