Personal Finance

Three Retirement Strategies for Self-Employed Workers


Many self-employed workers focus on retirement savings strategies that will give them an immediate tax advantage, but they may overlook opportunities to maximize investment returns over time.

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Here are three strategies that could help you put away a lot more money for retirement and/or protect your savings:

Strategy #1: Set Up a Solo 401(k) Plan

If you own your own business or are self-employed, one strategy that can make the most of your long-term savings this tax year and beyond it to set up a Solo 401(k).

Under new Solo 401(k) rules for 2012, you can contribute up to $50,000 this year or $55,500 if you're 50 or older. A couple working in a business together could put in up to $100,000 for retirement (up to $111,000 if both are over 50)!

Part of that savings is a salary deferral—just like a regular or Roth 401(k)—with a maximum contribution of up to $17,000. The other portion comes from profit-sharing, allowing you to add up to 25 percent more to your nest egg, up to $50,000 (or, if you're 50 or older, $55,500). That second part cannot be made as a Roth 401(k).

But Susan John, chair of the National Association of Personal Financial Advisors, suggests if you can set up a Roth 401(k) for the salary deferral portion, definitely take advantage of it.

"It's an opportunity to build a stream of tax-free income for the future that will never, ever be taxable. Even though you don't get the deduction right now, it's probably the most important contribution that a person can make," John advises.

Strategy #2: Open a Health Savings Account

Opt for a high deductible health plan and open a Health Savings Account or HSA. The money you put in a HSA is tax-deductible and the money can be taken out of the account tax-free for qualified medical, dental and vision expenses. Any money you don't use can be invested and gains are tax-deferred.

John says HSAs provide an additional cushion for your nest egg.

"Having a pool of money that you can use to bridge the gap between an early retirement and the availability of Medicare to cover insurance premiums during that period of time is just a real sleep-at-night technique," she says.

To fully fund an HSA, contribution limits are up a little this year—up to $3,100 for an individual and $6,250 for families, and those 55 and older can add an extra $1,000 wiith a catch-up contribution.

Strategy #3: Buy "10 Pay" Long-Term Care Plan

Finally to make sure there are never any unexpected costs for assisted living, nursing home or at-home care, opt for what's known as a "10-pay" long-term care insurance plan.

You make 10 annual payments and that's it. Pay off the policy in 10 years and you won't have to worry about your premiums going up ever—you're done.

Federal government data shows at least 70 percent of Americans will eventually need some kind of long-term care services after age 65.

"Regular medical insurance doesn't cover long-term care expenses. You don't want to use up your saving to pay for long term care," says Denise Appleby, founder of Appleby Retirement Consulting. "It's a good strategy if you have a lot money you want to protect."