10 Steps to Start an IRA for Small Business Owners and the Self-Employed

10 Steps to Start an IRA for Self-Employed People and Small Business Owners

An Individual Retirement Account (IRA) is a savings account, which is designed to help individuals save for their retirement. IRAs are popular as they enable an individual to save for retirement with tax-free growth or on a tax-deferred basis.

There are two different types of IRAs — Traditional and Roth IRAs. The principle difference between the two is that traditional IRAs can provide a deduction for the contributions holders make and are able to defer taxes on investment earnings until the funds get withdrawn. With a Roth IRA, holders get no deductions for contributions, but their investment earnings will be distributed penalty and tax-free on retirement.

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A SEP (Simplified Employee Pension) IRA is a type of Traditional IRA for self-employed people or small business owners. A small business owner with one employee or more, or anyone with a freelance income can open a SEP IRA.

IRAs can be a good retirement for small business owners or self-employed people as they are easy to set up and individuals don’t have to pay tax on the dividends or capital gains that the investments earn.

How to Start an IRA for the Self-Employed and Small Business Owners

If you’re thinking about starting an IRA, take a look at the following 10 steps on how to start an IRA.

1. Decide Which IRA Would Suit You Best

Prior to starting an IRA, it is important to decide whether a Traditional or Roth IRA would cater better to your individual needs. Factors such as your age, your income, contribution limits, whether you can claim your contributions as a deduction on your tax return, and how much money you will need to open an IRA should be considered when deciding which type of IRA to opt for.

2. Think About Opening a SEP IRA?

Small business owners may want to open a SEP IRA, whereby tax-deductible contributions for the business or individual are put into a traditional IRA, which is held in the employee’s name. Only the employer can contribute into a SEP IRA — not the employee.

3. Choose Where to Open An IRA

You’ll also need to decide where to open an IRA. When choosing where to open your IRA, it is advisable to look for an account provider that has low or no account fees, provides comprehensive customer support, offers a selection of no-transaction-fee mutual funds and commission-free exchange-traded funds.

4. Decide How Much of an Initial Deposit You Can Make?

When setting up an IRA fund, decide how much initial funding you can do. Some brokers have $0 initial deposit minimums for IRAs, but you should be aware that their mutual funds will require minimum investments of at least $1,000.

5 Make Your Investment Choices

It’s important you’re aware that your IRA fund can be invested in several ways, including bonds, mutual funds or individual stocks. When setting up an IRA, think about your investment choices, and whether you want to go through riskier growth funds or slower-growing but safer market funds.

6 Decide Whether You Have Time to Manage Your IRA?

Small business owners are busy, and you should therefore ask yourself whether you’ve got time to manage your IRA investment. If not, having a robo-advisor manage the account for you, which uses a computer algorithm to manage your investments based on your goals, can make cost-effective and time-efficient sense.

7. Decide Whether You Will Open an IRA as a Single or Married Holder?

You can open an IRA either on your own or with a spouse. It is important that you’re aware married holders can double the contributions they can put into the IRA.

8. Consider Opening the IRA Online

Once you’ve decided on the type of IRA and provider you want to go with, one of the easiest and quickest ways for time-strapped business owners and entrepreneurs to open an IRA is online.

Simply head to the provider’s website and fill in the information the provider needs to set up the account. This will include your social security number, contact and employment information.

9. Decide How You Want to Fund Your IRA

When setting up an IRA, you will also need to decide how you will fund the account. If you are transferring funds from a bank account or brokerage account, you will need your account number when setting up your IRA.

10. Set Up Automatic Transfers

For small business owners starting out with an IRA, it can be easier to set up automatic transfers in which you’ll instruct your bank to regularly transfer money into your IRA.

This way you will make regular savings into your IRA without having to spend time transferring money when it could be better spent on growing your business.

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Gabrielle Pickard-Whitehead Gabrielle Pickard-Whitehead is a professional freelance writer and journalist based in the United Kingdom. Since 2006, Gabrielle has been writing articles, blogs and news pieces for a diverse range of publications and sites. You can read "Gabrielle’s blog here.".

4 Reactions
  1. You can have both a Roth and traditional IRA at the same time. This gives you the flexibility to contribute either pre-tax or post-tax dollars depending on how your year went financially.

  2. Being self employed has its perks. You get to control your own time and you get to work at your own pace. However, you also need to register yourself in different agencies not to mention the constant distractions you have to face when you are working.

  3. Look carefully at the Roth IRA, which you fund with after-tax dollars. My wife and I religiously put in the max for our conventional IRA with before tax dollars each year and now that we are older, we’re forced to take Required Minimum Distributions at our present tax rates. We have no deductions, no mortgage, no kids, … and therefore find ourselves at a much higher marginal tax position than when we were younger.

    • What James says is so true. My “financial adviser” kept telling me that I would be in a lower income bracket when I retire. I will have less income, but I will still be in the same tax bracket, and being in a high income state I will have to pay about 31.4% to taxes. So my investments aren’t worth what the amounts that they are.

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