Some might argue that selfemployment isn't that different from any other type of employment. You still have to work. You still make money. Someday, you still hope to retire from that job. But that's where you'll find definite dissimilarities. Retirement. It's not as simple as choosing your 401k options with an employer.

If I can get to 10%, a double digit percentage of my pay, of my gross pay, my pretax pay, I'm in the right ballpark. If you're self employed, then the onus is on you, of course, to put know everything into your own personal retirement plan.

Welcome to Nerdwallet's Smart Money podcast. I'm Sean Piles.

And I'm Elizabeth Ayola.

Today we bring you episode three of our nerdy deep dive into self employment. Today we're focusing on the years that come after working for yourself, the years you hope to retire.

I hope those years are closer than farther away Sean's.

But yeah, me too.

When you work for someone else, your retirement options are mostly decided for you usually have a pension or a 401 or a 403 b. But the choices are really limited to whatever your employer offers. But that's not the case if you're self employed.

No. In fact, you have a lot of choices to make. And today we're going to ask, do you incorporate so you can get one set of options, or do you not and get another set of options? And how much can you set aside for each? That's what we're going to explore. To help any of you who are thinking about going to work for yourself, make sure you're also making the right decisions for your post working life.

I think that's probably the most important aspect of all of this, making sure that you're contributing to retirement in some way. Even though you're self employed, it's so easy to let your retirement savings slide or just like to procrastinate. Especially when your early years of self employment aren't very profitable. You want to squeeze all you can out of the paycheck, and it just feels like retirement savings can wait. But if you don't want to have to wait until way beyond the retirement age to pack up your work desk, it's something worth thinking about and starting.

Yeah, it's never a good idea to wait on retirement savings, so we're going to talk through how to do that, even on a limited business budget. We'll also look at how selling your business down the line could be an extra financial help in retirement. All right, well, we want to hear what you think too, listeners, to share your ideas, experiences and questions around self employment with us. Leave us a voicemail or text the nerd hotline at 901-730-6373 that's 91730 nerd. Or email a voice memo to podcast@nerdwallet.com. So, Elizabeth, who is helping us out.

Today, we have Aisha Seldun. She is a stockbroker, a certified financial planner, a real estate investor, and an art collector. Aisha has been in the finance world since 2000, so that means she has abundant knowledge and expertise to share with us.

All right, well, stay with us. We're back in a moment.

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Welcome, Aisha.

Hi. Thank you, Elizabeth. I'm glad to be here.

From my knowledge, Aisha, you happen to be self employed and also informal employment. Is that correct or am I wrong?

So I work for a firm that is a wealth management firm and we offer our advisors two different tracks. One, you can be a w two, employee, which I was in our firm for the first 14 years of my career. Almost ten years ago, I pivoted to our franchise side, which on that side we're 1099 independent contractors. And so yes, I am self employed. I hire my own staff, I pay my own rent and other expenses and health insurance and self employment tax and all that good stuff.

So that said, I want to ask.

You, how did you get started with.

Retirement savings as a self employed person?

So a part of it is just what I do professionally, right. I happen to grow up as a wealth manager. I'm a certified financial planner and have been so for became a CFP in 2003. I became a securities registered representative back in 2000, almost 24 years ago. It was kind of ingrained in me. So me being a person that tries to practice what I preach, working with clients to help them with retirement savings, it made sense for me to learn those practices and habits really early on. Obviously, the earlier you can start when we start thinking about things like compounding interest and how that works. Time is one of your biggest advantages. So I got started planning for retirement when I was in my very early 20s.

So when I speak to self employed people, a lot of people are so busy trying to make money that they haven't stopped to think about retirement. And they're kind of like, I'll do that when I have more money. What are some main hurdles that self employed people face when it comes to saving for retirement?

One of the things that makes it just a little bit more challenging for folks who are self employed is really just the consistency of pay. If you have a w two job, for example, if you're an employee, usually your pay is fairly predictable. You'll get typically the exact same amount outside of like, bonuses. Or if you're an hourly employee, your pay may vary slightly, but for the most part, w two employees tend to get very consistent, steady income. What we find for independent contractors or self employed folks, it's usually based on sales revenue, and you may have a great month or a great quarter or a great first half of the year, and the back half may look totally different. So that becomes a little bit more challenging for business owners to figure out. How do I manage my expenses considering the fact that my income is so inconsistent? We try to give them different ideas and techniques on how to maybe put them on payroll, put themselves on payroll, and they take a consistent income so we can show them how they can manage not only their expenses, but also how do they consistently save for goals like retirement, or maybe education planning for their children or building an emergency reserve.

So this is interesting because I was chatting to some women I met over the weekend, and they happen to be newly self employed, and they were talking about how they've kind of put off their retirement savings for similar reasons that you mentioned not having consistent income or just trying to focus on other financial goals. So do you see that as a hurdle for some people as well? Maybe thinking saving for retirement is too difficult or they need more than they have. Things like that.

It's a daunting thing, right? Particularly if someone's maybe in their they're trying to get this business off the ground. Normally the business and its expenses take precedence. And if you have employees, for example, you can't not pay your employees because you want to put money into your set by your a or 401k. Oftentimes what we find is that if clients are so focused on the long term goals like retirement planning or college savings, that they forget about making sure that they have emergency money set aside. So, for example, if you put together a very elaborate retirement plan but you have no emergency savings, and then something happens because that's life. Life be life in, as we say. So if you have no emergency reserves but you have yet a very elaborate retirement plan, what you're going to have to do is dip into that retirement plan. And just starting habits like that can be quite challenging because once you're in the habit of busting into your set by your rate for emergencies, it becomes a long term habit.

I also want to ask you in terms of retirement savings for people who are not very conversant with how much they should save. And I know that varies from person to person, what is a ballpark percentage or figure you would give? I know at nerd wallet we say you should try to save maybe around ten to 15% of your pretax income.

Yes, I'm a huge fan of just getting to that double digit percentage. If I can get to 10%, a double digit percentage of my pay, of my gross pay, my pretax pay, I'm in the right ballpark. If you're self employed, then the onus is on you, of course, to put in everything into your own personal retirement plan. I understand that being on the self employed side, you don't get some of the health and welfare benefits like a 401K match or like stock options that you'd get being a w two employee. However, there are a lot of advantages of being a 1099 independent contractor that you don't get being a w two employee, such as the ability to write off your business expenses in a very clean way.

Another thing that came to mind while you were talking is I personally, as I've mentioned before, am self employed. And while I do have a savings goal for my self employed income or rather retirement savings goal. Because of the inconsistent income, sometimes I'm not able to do it monthly. And I know dollar cost averaging can play into how your retirement savings pans out. So then how does that dollar cost averaging work for people who are like, hey, you know what? I'm just going to save for retirement quarterly or every time I get a lump sum of money, you know what?

That's totally okay. And in fact, I'm a huge fan of the year end, something we call a true up, where by the end of the year, if you were not able to consistently save, maybe biweekly or save on a monthly basis, if by the end of the year you can still true up to make sure that by December 31 you're able to put in what would true up to roughly 10% of your pay into a 401k, that's totally okay. Obviously you want to be able to get the funds into the plan as quickly as possible, but we wouldn't see a huge variance in end result if you're just trueing up by the end of each year, meaning by December 31, you're able to just dump in enough to get you up to 10% of pretax savings or after tax savings. Whatever your focus is based on a plan you've worked out with your tax advisor, that's totally okay too.

Okay, that's good to know. So you've been mentioning 401 set iras. Let's get into the actual retirement accounts that self employed people can use. So can you kind of run me through the basic accounts and also the benefits of each?

So you essentially have different types of retirement plans that are qualified under something called defined benefit plans, which are more like traditional pensions. And then you also have defined contribution plans, which are more traditionally like 401. So one of the things that you'll want to do is figure out what are you using this plan for? Do you want access to it now? Or are these funds that you're never planning on touching until you're age 59 and a half, or when you plan to fully retire post 59 and a half? Because different plans have different rules on when you can have access to them versus others. So, for example, the plan that can be set up for both w two employees through an employer, or you can also set up a 401K as a self employed person setting up your own plan. So, for example, let's say you have your own company. You're the only employee. You can set up something called a solo 401K. It's essentially your plan as a business owner, even if you have a spouse or significant other who works within your company. That person, if they're a spouse, can also have access to your solo four hundred and one k.

The solo four hundred and one k is specifically for folks that don't have other non spouse employees. So both you and your spouse or domestic partner can have access to that solo 401K as well.

So, Aisha, can you run us through, I personally have a Sep IRA. That's the one I use. So can you run us through what Sep IRAs are and also simple IRAs as well?

Yes. So a Sep IRA and a simple IRA are specifically iras for self employed individuals. It's important to note who can have a Sep IRA or who can have a simple IRA. Do I have to be an LLC? Do I have to be a C Corp or an s corp? If you're self employed, even if you're a sole proprietor, you can have any of the retirement plans that we've talked about. A Sep IRA, you can have a simple IRA, you can have a solo four hundred and one k, of course, depending on the number of employees you have. Or you can have a traditional 401K plan. So these plans are designed specifically for anyone who has 1099 income. You're an independent contractor. There are so many different ways of structuring these. A step IRA and a simple IRA. How much you contribute is going to vary depending on which type of plan you set up. So a simple IRA, for example, is a plan that very similar to a employee. So if you're the employee or your spouse or domestic partner is the employee, they're going to save a percentage of their income as an employee and as the employer, which you can be both the employee and the employer of your company.

If you're self employed, you're also going to provide an employer match. That's how a simple IRA works. A sep IRA is done a little different. All of the contributions are made by the employer. So as a percentage of your overall pay, your employer is essentially contributing for themselves, their domestic partner or spouse. That percentage of their pay is going into a separate.

So how does that work? If you're a one man business, how do you end up having to match your pay?

If you're a one man business or a one woman business, you are, in essence still multifaceted in the sense that you're both the employee and the employer. So if I have my cell phone payroll, for example, if I'm paying myself a salary of $50,000 a year for my business, if I'm contributing 10% of my pay, which would be $5,000 as my employee contribution. And then as the employer, I can do a match on my pay of either dollar for dollar up to a certain percent, or $0.50 on the dollar up to a certain percent. Also, as the employer, in addition to the employee match, I can also do other contributions, like profit sharing contributions. So if the business does very well, I can contribute both. As the employee, I've got my employee contribution, then I've got my employer match, and then if the business has a great year, I can do an additional maybe 10% of my pay or 15% of my pay as a profit sharing contribution as well. So there are different sources of money that you can put into the plan, but it's important to note that when you're self employed, not only are you the employer, but you're also the employee, which is another reason why it's a really good idea to have yourself on payroll, so that you and your accountant can sit down and figure out exactly what percentage of your pay are you contributing to this plan.

So while we've been mostly throughout this series talking to people who don't have multiple employees or like myself or just kind of a one man or woman business, what about planning for the future? So what about people who maybe in the next couple of years might decide to expand which retirement accounts may be.

Ideal for know, I generally tell folks, even if they're new businesses, to somewhat begin with the end in mind, which is a quote I got from Stephen Covey. I think it's StEphen CoVEy Many, many moons ago. Even if it's just you operating your business as both the employer and the employee, maybe you have a spouse or domestic partner who's also in your business. Most folks will say, well, I can set up a Sep IRa because it's just me running and operating my business. I really want folks to think about, and I encourage folks to think about where do you see yourself going with your business? Where's your business going in one year, three years, five years, ten years? If you plan on maybe hiring someone in three years full time, or even if you plan on in the first three years of your business possibly having seasonal employees or part time employees, and you think that you may have that person working through your business as a w two employee, I'd say start the retirement plan based on where you think that business is going. I've seen a lot of folks say already, let's just meet.

And they start a Sep IRA, for example, and then a year later the business is doing very well. And they have to hire someone full time as a w two employee, and they're like, what do you mean? I have to put 25% into their retirement plan as well? I mean, that's a huge expense for a relatively new business. So it's a part of the reason why we start having folks think, all right, if you think you're going to bring in someone sooner than later, I probably already start out with a retirement plan that would be based on the expectation that I may have some employees.

So I personally want to save as much as possible so I can retire before the set retirement age. And I'm sure some people out there want to also.

So with that said, can you have.

Multiple of any of the accounts that you mentioned at once? Or is it that if I open a sep IRA, I can only have that? So could I have like an IRA, a simple IRA, a Sep IRA, all at the same time?

So there are maximums that you can put into your plan. So what I would do is I would sit down with my tax advisor to make sure that I'm not exceeding the combined maximum on all of those plans. So very rarely do I see someone who has a business that has a 401 and a separate IRA for that same business. Because you want to make sure that you're within the limits of how much the IRS allows you to put into a defined contribution plan. For example, you can have, for example, both a traditional IRA or Roth IRA and a SEP IRA or simple IRA, and you still get the maximums that apply to traditional and Roth IRAs and the maximums that would apply to your SEP or simple IRA. The same with a 401K plan. I could have my own solo 401K plan, for example, still have a traditional and Roth IRA and still get the limits, the maximums that I'd get on both my, I'd also still be able to max out my Roth IRA, for example, provided I'm within the income limits. So I always encourage folks to sit down with a tax advisor to make sure that you're not over contributing.

My wheels are turning. Like how do I make more money to put inside my retirement account? So are there any advantages? I know you have mentioned a few, and actually we are just discussing one, which is that you could potentially put away more money than a nine to fiverr. But are there any advantages to the retirement savings process as a self employed person that nine to five individuals don't have?

Sure. If you're a w two employee, you have a very hard limit on how much pretax you can put into your 401K plan that number that you can put in pretax as both the employee. If you're self employed, you have your employee contribution limit that you'd get if you were a w two employee somewhere else, you'd get that limit. And then you also get the amount that you can defer from your business. Also pretax both between the employer contribution and the profit sharing contribution. So in essence, if you're self employed, you can get in north of $60,000 a year, all pretax from your business. You'd never be able to do that much, defer that much pretax if you were a w two employee.

Good to know. Those who are listening, this doesn't mean you should go quit your job, but very good to know. But maybe you should. I don't know. All right. So moving on, next, I heard some people use mutual funds or index funds and like to house their investments for retirement there versus using one of the tax advantage accounts that we've mentioned, like an IRA. So are there any benefits to this, especially for self employed people?

I'm so glad you said that because I want to give some clarity to what you can put into what are called qualified plans, like a 401, IRAs, they grow tax deferred. They're qualified plans. So these terms, a traditional IRA, a Roth IRA, all these are tax codes, right? So this essentially just tells the IRS how you can put money into this pretax or after tax, and then when you turn 59 and a half, how you can take money out of that plan, whether it's taxable or tax free. Right? So that term, four hundred and one k or traditional IRA or Sep IRA, these are just tax codes. And how I liken them is think of these tax codes like a glass, just a regular mug or glass, and you can put anything you want inside of that glass. So you can put orange juice inside of a glass, you can put water inside of a glass. You can put coffee inside of a glass. If it's 05:00 somewhere, you can put gin and tonic inside of a glass, right. Get a little spicy. These are how tax codes work. And essentially what you put into that glass, that's the strength of it, that's the flavor of it.

401 ks, iras, it's the exact same. I can put whatever I want inside of that glass, inside of that tax code. I can put mutual funds in a IRA. I can put etfs, index funds, I can put individual stocks. I can put money market accounts, which is a cash equivalent. I can put cds, I can put anything I want inside of these plans. So just like outside of a qualified plan, I can have mutual funds, right? Or I can have exchange traded funds or etfs or index funds. I can have all of those outside of a qualified plan, but I can also put those inside of a qualified plan. So all the things that you just mentioned that can be in a regular brokerage account, think of that tax shelter as just a code that tells the IRS, when I sell this mutual fund and I take money out of it, how do I pay taxes on it?

All right, so the last question I.

Have for you, Aisha, for people who are self employed, who are maybe thinking in the next ten years to expand their business, but who don't want to have this business for the rest of their lives, and maybe have thoughts of selling their business eventually even to fund their retirement. So let's say you have someone who says, I own this business and I plan to grow it and then sell it and live off of that money for the rest of my life. Do you think it's a good idea to plan to fund your retirement using the strategy? What are some of the risks?

Absolutely. Most people build a business for a potential exit. Right. What is my out here? And selling a business and having the valuation of that business be what will ultimately fund your retirement can be a great idea. The risk of that is the business flops, right. Or doesn't go anywhere, or regulation comes in and you've put all your eggs in this one basket and there are regulatory changes that substantially change either the cash flow of the business or how that valuation number is projected. So I believe in diversification, but it's totally okay to think about using your business valuation as being. This is what I plan on using as my retirement nest egg. If that's the only thing you're going to do, you just got to be really sure that you're going to be able to sell that business for what you think the current valuation and future valuation will be. And just be very aware that sometimes there are different industries where either regulations come in or, I mean, with the fast developing AI and some of this technology, will that ultimately diminish what kind of business you're building and will that ultimately diminish its value?

So those are things that I'd say just be a bit aware of and a part of the reason why I'd say you should probably think about diversifying that retirement nest egg, because having all of your eggs in one basket can obviously be a huge risk.

Yes, I'm with you. And before we go, for anybody out there who is still hesitant, specifically self employed people, about saving for retirement, do you have any last words for them?

Get started where you can build the habit early. It's so easy to fall into the traps of making sure that all our expenses are paid, both business and personal. But the earlier you can get started setting aside money for both emergency reserve for yourself and for your business and ultimately for retirement, the better off you'll be. Love that.

Thank you so much, Aisha. So, Aisha Selden, thank you so much.

For your help today.

We appreciate you.

Thank you.

Life be lifein. I love that line from her. But one of my big takeaways from your conversation with Aisha is how much flexibility people have when it comes to when and how they fund their retirement, no matter what type of account or accounts they're using. And given how up and down income can be when you're self employed, it is really reassuring to hear that people don't need to make contributions from every single paycheck to be on track. True, upping contributions before the end of the year is a great tactic there. But Elizabeth, I am wondering now, are you rethinking how you're funding your retirement as someone who runs their own business?

Yes, Sean. So I am a lump sum queen. I do love to pay in lump sums, not only because my income is inconsistent, but also because sometimes I want to spend my money on other things, to be honest.

But yeah, but I think from this.

Conversation I've realized that there are so many options that self employed people have, especially when it comes to saving for retirement and building wealth. Also, I think I may look into putting myself on payroll to make all the math easier, too. And then after listening, I also feel motivated to open a few other self employed retirement accounts just to maximize my savings.

Look at you. So savvy.

I know.

Check me out.

Well, I also really liked Aisha's advice about thinking about where your business is going to be in the future. Retirement planning is all about what's happening years down the road. And similarly, it's a good idea to set up your business's retirement plans according to where you think your business will be in the future. All right. Well, Elizabeth, tell us what's coming up in episode four of this series.

My heart is breaking. It's the last episode for this series.

I know, but we have so much more ground to cover. Don't worry.

So in episode four, we're going to tee up this series by talking about how to incorporate your business as a self employed person or whether you should at all. We're going to get into the pros and cons and hopefully give listeners clarity about what is best for them.

These are basically business structures that allow you to separate yourself from your business, I. E. Your business is essentially its own entity and you are an operating member or partner or owner or shareholder in that business.

For now, that's all we have for this episode. Do you have a money question of your own? If you do, turn to the nerd and call or text us your questions at 901-730-6373 that's 901730 nerds. You can also email us at podcast@nerdwallet.com also visit nerdwallet.com podcast for more info on this episode, and remember to follow, rate and review us wherever you're getting this podcast.

This episode was produced by Tess Bigland. I helped with editing. Courtney and Idell helped with fact checking. Sarah Brink mixed our audio and a big thank you to NerdWallet's editors for all their help.

And here's our super brief disclaimer. We are not financial or investment advisors. This nerdy info is provided for general educational and entertainment purposes, and it may.

Not apply to your specific circumstance.

And with that said, until next time, turn to the nerds. Our.