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You Quit Your Job, But You Still Need a Retirement Plan

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You Quit Your Job, But You Still Need a Retirement Plan

Self-employed business owners who want to save more than $6,000 a year can choose between two retirement savings accounts created for sole proprietors. For 2022, a simplified employee pension plan (SEP IRA) allows contributions of up to 25 percent of income, or $61,000 for 2022, while a solo 401(k) allows contributions of up to $20,500. With either retirement account, contributions are tax deductible and will reduce your taxable income. The only requirement for a solo 401(k) is an employer identification number, which is easy to obtain through the Internal Revenue Service.

If you were contributing to an employer-sponsored retirement plan before leaving your job, you can leave your account there (and possibly pay administrative fees), or you can roll it over to an IRA if you plan to find another job. plan, you might want to wait and transfer it to your new employer’s retirement plan, assuming one is offered. You also have the option of cashing out your 401(k), but you’ll be charged a 10 percent tax penalty in addition to paying income tax on the total amount because the account was funded with pretax dollars.

Saving for retirement can be difficult when you’re trying to build a new business and pay your monthly bills.

Before opening a self-directed retirement account, Mrs. Meyer recommends, make sure there is enough income to pay monthly bills, including health insurance premiums, and at least one way to pay for any unexpected expenses without using a credit card. Save less $1,000 in cash. Once those basics are covered, it’s time to save for retirement, even if it’s a small amount every month.

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“Psychologically, when you’re starting a new business, it can be challenging to tie your money up in long-term investments,” said Kristen Anderson, Catch’s chief executive and co-founder. The idea is to recreate the experience that users are accustomed to with an employer-sponsored plan, without locking them into saving a specific dollar amount each month. .

When Keegan Schmidt of Hopkins, Minn., quit her job as a financial advisor in October to work for DeeperthanMoney, an online financial literacy start-up that doesn’t offer employee benefits, she and her husband, Derek each opened a Roth IRA. The couple, both 27, set up their IRAs to deposit $500 out of their joint checking account at the beginning of each month. Each has a goal of saving $6,000 this year.

“With the 401(k), I have resorted to maxing out my Roth IRA, first and foremost,” said Mrs. Schmidt.

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