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Retirement Plan Options for Self-Employed Retired Military Officers

Retirement Funding

Many retired military officers decide to start a business. The allure of freedom and being the boss again can be quite compelling. The fact that you have a military pension makes starting a business a little less stressful, but to fully enjoy your ultimate retirement you will likely need to invest for that future using the proceeds from the business. Many business owners don’t consider this though in the beginning, as they are focused on making a profit. Years can quickly fly by, and when  it’s time to retire, there is nothing there.

The descriptions below will help you select the type of account that would work best for you. Here are a few options:

IRA

A Traditional or Roth IRA is good for individuals who only are able to invest up to $5,500 a year (or $6,500 if you are age 50 or older). There are advantages to both – Traditional IRAs provide a tax deduction now, but proceeds are taxable when withdrawn. With a Roth, there is no immediate deduction and withdrawals after you retire are tax-free. There are limits on how much you can earn when having a Roth IRA.  This could be a problem for a single retired senior military officer or if your business is very profitable. Compare your current tax rate with what you estimate your tax rate will be after your ultimate retirement to determine which choice is best for you.

SEP IRA

This option works for those self-employed with only a few employees. The contributions for this in 2018 is up to 25 percent of compensation, or $55,000 per employee.  Employers must contribute an equal percentage of salary for each employee, and you will also be counted as an employee.

Solo 401(k)

This is good for self-employed people who have no employees. You can treat 100% of your self-employment income up to an annually adjusted limit ($18,500 in 2018) as "salary" and contribute it all to a 401(k). If you receive wages from your business (as in the case of an S-Corp), your contribution caps are the same as other employee contribution limits to 401(k)s. You can then contribute 20% of net income up to an annual limit ($55,000 in 2018) to the 401(k). Finally, catch-up contributions are allowed for those age 50 and older and work the same as other contributions. When it is all said and done though, the absolute limit includes the catch-up contributions.

Defined Benefit Plan

This may work best for those self-employed individuals who have no employees and a high income. Much like your military retirement, you set up a benefit based on a formula (2.5% x Years Served x High-3).  The amount you can and/or are required to contribute will be based on how much you will be receiving once you retire, your age, and the expected return on your investments. Contributions are tax deductible in most cases, and the distributions during retirement will be taxed as income.

Simple IRA

This retirement option is ideal for business owners who have up to 100 employees. You can contribute up to $12,500, with a catch-up contribution of $3,000 if you are over the age of 50. If contributing to another plan, your contributions cannot exceed $18,500. The contributions are deductible, but any distributions during retirement is taxed. Any contributions you make to an employee account is also deductible as a business expense.

Getting a sound financial plan in place is just as important as having a thriving business. By planning for your second retirement and contributing to a retirement plan at your business you can set yourself up for the lifestyle you desire when you hang up your spurs the last time.


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