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Set up your retirement savings vehicle. If you were previously employed at a large, professional services firm, you probably had access to a 401k, where you could make contributions, pre-tax contributions. In the independent consulting world, you can set up a SEP-IRA. That stands for Simplified Employee Pension Individual Retirement Account.
Unlike a regular IRA, or individual retirement account, which has a contribution limit of something under 10 thousand dollars, a SEP-IRA has a contribution limit in the neighborhood of $56,000 in 2019 and it typically goes up a little bit every year. You can contribute up to 25% of your adjusted gross income or $56,000, whichever is less.
So, if you were earning less than $56 x 4, around $230,000, your limit would be under $56,000, 25% of your adjusted gross income. And you can set up a SEP-IRA with most large asset managers. Vanguard, Fidelity, and other large asset managers. You just call them up, you set up a SEP-IRA.
If you’re in the enviable position of being able to save more than $56,000 a year for retirement, then you can talk to your tax accountant about setting up a defined benefit plan for your business. This is a little bit more involved. You’ll have to engage an actuary to look at your own lifetime, and figure out how many years you can live and so forth. How many years you’re likely to live. And come up with the rules of the defined benefit plan based on that. But with a defined benefit plan, you’re able to contribute a larger amount than $56,000 a year.
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