When you work for a company, you might have options to save for retirement that come with the job. As a business owner, you have different choices to make. Here are a few things you should know about saving for retirement as a contractor.

Types of Retirement Savings Accounts
There are a few types of retirement savings accounts that you should understand. They have several differences, so you should be able to distinguish them before you make a choice. These include:

• 401(k)
• IRA
• Roth IRA

A 401(k) is an employer-sponsored retirement plan. It is possible to open a 401(k), even if you are a sole proprietor. Business owners might gravitate toward an IRA, which tends to cost less to set up and maintain. An IRA is an independent retirement account that people can contribute to, and most people can deduct the contribution from their federal taxes. You pay taxes as you take withdrawals. A Roth IRA offers a similar investment vehicle, but the taxation is different. People can’t claim Roth IRA contributions on their taxes, but they generally don’t have to pay taxes on the withdrawals.

Contribution Limits
For each type of retirement account, there are specific contribution limits that mostly depend on age. A 401(k) usually offers the highest limits. For 2022, people under age 50 can contribute up to $20,500 of their salary. After age 50, they can contribute an additional $6,500. For a traditional IRA, you can only contribute $6,000 per year, or $7,000 per year if you’re over 50. A Roth IRA has similar limits, but there are a few more restrictions. Specifically, the ability to contribute to a Roth IRA phases out at higher incomes.

How to Diversify
Diversification of your retirement plan is an important way to minimize your level of risk. People who put all of their retirement savings into one account may have a higher level of risk, especially if they aren’t investing in something that spreads out the risk like a mutual fund. It’s better to have more than one account or investments in multiple arenas, just in case one of them ends up losing a lot of money. It’s wise to consult a financial advisor, particularly if you don’t have much experience with investing. They can help you evaluate your retirement goals and diversify your portfolio in a way that helps you achieve them.

Importance of Compound Interest
The reason many financial experts recommend that you start saving as soon as you can is the benefit of compound interest. Most savings vehicles allow you to compound the interest that you earn, which increases your principal over time. For example, take an investment of $10,000 that increases in value by 5% each year. After the first year, you’re calculating the increase based on $10,500, not $10,000. As you continue to make contributions, the value of your investment grows both ways. Over a period of decades, you can turn a relatively small investment into something that you can live off of during retirement.

Increasing Contributions Over Time
For most people, the amount of money that you’re willing and able to save goes up over time. Inflation changes the value of necessary items like housing, medicine or food. You don’t want to be caught saving too little because your original plans were based on a cost of living that doesn’t make sense anymore. Instead, get in the habit of saving, and make periodic increases when possible. You might not be able to contribute the maximum right now, but you can always work toward it. This is particularly important for contractors who can’t start saving early in their careers. Adding more at the end might not give you as much compound interest, but it will still help.

Saving for retirement may be more complicated as a contractor, but there are ways that you can start working on it now. For more information on what you’ll need to be a successful business owner, contact CSLS today!