Future Planning: Retirement Options for Women Entrepreneurs

Over the past several years, the number of women-owned businesses rose to 13 million, accounting for 42% of all U.S. businesses, and women were well on their way to achieving higher numbers. But as COVID-19 struck countries around the globe, women, unfortunately, took a harder hit. CNBC reports that only 41% of women have been able to save for retirement on a monthly basis, compared to 58% of men. But even before the pandemic, women were already found to have less confidence in their retirement savings plans, something that can be attributed to lower pay.

Seeing this inherent gap, it grows evident that women entrepreneurs need to be looking into more comprehensive financial plans that can support their retirement, especially during these uncertain times. Here are four retirement options to look into:

Traditional IRA

Investing, particularly in terms of retirement, is a category covered by finance site AskMoney. In their guide to Individual Retirement Accounts (IRAs), they explain that similar to savings accounts, you would also deposit money into your IRA account. This money is actively invested in financial products like stocks, bonds, and other assets that all have a likelihood of providing higher profits over time to use for your retirement.

The IRA has a wide variety of advantages—money deposited isn’t taxed until you begin withdrawing funds during retirement, and the taxable income you’re earning is reduced by the amount you add to the IRA each year. However, you can only put in up to $6,000 if you’re under the age of 50 in 2021, and there are tax deductions for making withdrawals before retirement age.

SEP IRA

A simplified employee pension (SEP) IRA could be for you, as it is designed mainly for small business owners who have little to no employees, as well as self-employed people. Take note, however, that your contribution rate must be the same for all employees, and your employees themselves cannot contribute.

A key bonus is that the SEP contribution limits are much higher than those for traditional IRAs because the amount of money you can put into your SEP is based on your earnings. You can invest up to 25% of your earnings, with a maximum cap of $57,000. You can also open up an account without any third-party service.

SIMPLE IRA

A savings incentive match plan for employees (SIMPLE) IRA on the other hand is an account where employees and employers can both contribute to a traditional IRA. If you are both the employer and employee, you also qualify. For this plan, two annual contribution requirements are needed for each employee. You must match all employee contributions, with a cap of 3% of the employee’s compensation. For employees who did not put in money, you must contribute 2% of the employee’s compensation, with a cap of $290,000 for 2021. Any business with 100 or fewer employees can set up a SIMPLE IRA.

Individual 401(k)

If you have no employees, then a 401(k) might be the best option for you. It has a contribution limit of $58,000 for 2021, plus a $6,500 catch-up contribution or 100% of earned income, depending on which is less. In our ‘Make the Most of Your Retirement Savings and Achieve Your Goals‘ article, we recommend maximizing your 401(k) as much as possible through evaluating your contributions, understanding the tax implications, and starting as early as possible. Similar to IRAs, withdrawing money from your 401(k) before retirement means you must pay both income tax at your current rate and a 10% penalty for withdrawal.

In 2019, nonprofit organization SCORE reported 34% of small businesses do not offer retirement plans for their employees, and 37% of business owners lack retirement savings themselves. But it’s never too early or too late to change these numbers and start looking out for your financial future, as well as any employees you might have. Even the busiest women entrepreneurs should make time to consult and find a retirement option to work towards.

For more information check out our other articles on Women’s Business Daily.