The repercussions of the Coronavirus crisis are unlike anything most of us have experienced in our lifetime. We have seen our country suffer from an economic crisis in the past, such as during the Great Recession of 2007-2009. However, while it is useful to note such events, it should not be forgotten that the situations are very different.
The economic crisis of 2020 is driven by a social effort to control the spread of the virus by shutting down large parts of the economy as opposed to being affected by financial fundamentals. This means that the country is suffering from an unemployment rate that has hit an all-time low. However, like with all things, we power through. In the wake of business closures and job losses, many people are surviving by turning to self-employment.
Below, we discuss some of the best retirement strategies for the self-employed, which will hopefully set you up for a financially smoother post-pandemic life.
The Impacts on Retirement Saving
Now that we know the repercussions of the 2020 economic crisis will differ from the Great Recession of 2007-2009, let's take a closer look at the pandemic's impact on retirement saving.
If You’re Still Working
If Coronavirus hasn't managed to steal your job, then we're sure you know that you're one of the luckier ones. Even if you're worried that this may not be the case for long, it's still a good idea to start considering retirement planning strategies. These might include the 401(k) or social security, just to name a couple. However bad the Coronavirus crisis may be, neither you nor your employer should stop contributing to your funds, meaning you can continue preparing for retirement.
Look on the bright side – you might actually be saving more money. Once you've added up the amount you'd normally spend on commuting and social activities, we're sure you'll have saved a decent amount. These savings can contribute towards your financial planning for retirement. If this is the case, we recommend you take the opportunity to start saving for retirement. Keep reading for our best retirement plans.
If You’re Out of Work
Obviously, this is a very different ball game. You might need to consider tapping into your emergency fund or unemployment insurance or seeking further retirement advice if you still want to start saving for retirement. There's also the option for government assistance, such as the CARES act, which can provide up to $1200 for each adult and $500 for each child within households earning less than $99,000 during the pandemic.
The next step is to consider looking for another job. Alternatively, you might want to go self-employed if you haven't already. There are many different ways you can make extra money to continue preparing for retirement and make up the contributions. These include starting a side project, putting money in investments, or what we like to call a side hustle.
Retirement Strategies for the Self-Employed
If you think self-employment will benefit you most, you can now use the best retirement plans for the self-employed. It's never too early to start financial planning for retirement, and we're here to help.
According to the IRS, there are 3 popular retirement strategies to choose from.
One participant 401(k)
Let's take a closer look at the best self-employed retirement plans below.
One Participant 401(k)
If you're looking for the best retirement plan for the self-employed offered by larger companies, you might have found it in the Solo 401(k). This self-employed retirement plan allows you to make deferrals of your salary up to $19,500, and an extra $6,500 if you're 50 or above. Alternatively, you can contribute up to an extra 25% of self-employment earnings for contributions up to $57,000.
If your spouse is also employed by your business, he/she can match these contributions, meaning they can become extremely generous.
If you have an employer identification number, you can open a Solo 401(k) with the help of numerous financial institutions. These include:
This option is a variation of the more traditional IRA. It is one of the easiest self-employed retirement plans to operate and establish, making SEP IRA as one of the better retirement planning strategies.
Unlike the Solo 401(k), you can contribute as much as 25% of your overall earnings from self-employment up to $57,000 in 2020. However, you should bear in mind that there is a slight catch – you'll have to do so for all of your eligible employees for up to 25% of what they are compensated.
The setup process is even simpler than with the Solo 401(k) and involves a simple online one-page form. This can be done through:
The SIMPLE IRA (Savings Incentive Match Plan) is a good mixture of the SEP IRA and the Solo 401(k). This is an ideal choice if you are self-employed and running a small business with 100 employees or less.
You can put all net earnings into this plan, up to a maximum of $13,500 in 2020. If you are over the age of 50, the maximum is increased to $16,500.
Your employees can contribute to the same annual amounts alongside you. However, bear in mind that you will be required to contribute up to 3% of each of your participating employee's incomes each year. Alternatively, you can choose to contribute a fixed 2% to each employee's income as long as they are eligible, regardless of whether they are contributing to the plan or not.
The one downside to this plan is that the setup process is slightly heavier than the previous two options. You will need to physically open an account with a relevant financial institution. These include:
On top of these plans, don't forget that setting aside a different bank account to save up retirement money is always a good choice.
Self-Employed Retirement Plan Summary
Despite the Coronavirus pandemic's effects, it's more important than ever to start planning a retirement strategy, which is even easier if you are self-employed.
Here at The Logic of Money, we believe in stress-free personal finance. We promise to guide you on the best retirement plan for the self-employed, and other retirement advice.