Saving for Retirement as a Solo Business Owner

Congratulations! You decided to leave your 9-to-5 job to open your one woman shop. But, unlike a corporate job, solopreneurship doesn’t include a formal orientation with Human Resources. (Which were pretty boring anyway, right?)

So today, I’m going to answer your questions about solopreneur retirement options -- because being on your own means shouldering the weight of setting up your retirement options. Even so, it doesn’t have to be draining. To make it more enticing? Take my view and think of it in terms of your “financial independence.”

The best definition I’ve read of financial independence comes from Matt Becker of Mom and Dad Money (he’s also a fee-only financial planner). He defines financial independence as “The freedom to make decisions based on what makes you happy instead of what makes you money.”

When you’re financially independent, you can choose to spend more time with your family, travel, or volunteer. You can choose when to work, and how you work. Unlike your 9-to-5, it’s all up to you. But unlike your 9-to-5, you’ve got some decisions to make. Let’s begin.

What do I do with an old 401(k) or 403(b)?

One of the first questions I get from solo business owners, or anyone who’s changed jobs for that matter, is what to do with their old 401(k) or other company-sponsored retirement plan. As tempting as it may be to cash out and use the funds to grow your new business, I wouldn’t go that route. Yes, investing in your business is a good idea, but there are additional taxes and penalties for tapping into your 401(k) before age 59½. An early distribution will generally be subject to both ordinary income taxes and a 10% early withdrawal penalty. Plus, you lose future tax-advantaged growth.

You have three good options when it comes to your old 401(k), 403(b), or other company-sponsored retirement plan: do nothing, roll the funds over to a Traditional IRA, or roll the funds into a solo retirement account. Let’s explore those options:

1. Do nothing and keep the funds in your prior employer’s retirement plan

  • Pros: This is the easiest option, but if your account balance is less than $5,000, you might be forced into taking action. Additionally, you may have access to certain investments (think institutional funds with potentially lower expenses) that might not be available outside of this retirement account.
  • Cons: You’re limited to the investment options chosen by your employer. Additionally, you’ll be unable to make additional contributions. If you can still make contributions, they’ll be restricted.

2. Roll the funds over to a Traditional IRA

  • Pros: You typically have access to a wider range of investment options, including mutual funds and ETFs (exchange-traded funds) as well as individual stocks, CDs (certificates of deposit), and bonds. Additional contributions are allowed and you have the option to move assets to a future employer's plan. In addition, if you already have a Traditional IRA, all of your retirement assets will be in one place.
  • Cons: You can’t take a loan, but I wouldn’t recommend a 401(k) loan even if you had the ability to take it. Also, certain 401(k) investments may not be available.

3. Roll the funds into a solo retirement account like a solo 401(k) or SEP IRA

  • Pros: You can make contributions -- and employer contributions are considered business expenses. Loans may be allowed.
  • Cons: Potentially limited investment options. This isn’t so much of a con, but a consideration. Depending on your solo retirement account type and size, you’ll need to file forms with the IRS.
    • Another consideration to make note of: If you rollover to a SEP IRA and hire employees in the future, you’ll have to contribute to the SEP IRA on their behalf if you also contribute for yourself.

Whichever route you take, pay attention to the fees and expenses associated with your old and new retirement accounts. Sometimes it makes sense to keep your money in your old retirement plan if the fees and expenses are much lower than a new retirement account.

Additionally, if you plan on rolling over your old retirement plan into another plan, make sure the new plan is set up first. Consider requesting a direct rollover, right to your financial institution. This is also referred to as a trustee-to-trustee rollover, and it can help ensure that you don’t miss any deadlines.

Where should I save if I’m starting from scratch?

Maybe you’re not coming from a former employer with a company-sponsored retirement plan. No problem -- there’s no better time to start investing (and saving) than now! Here are a few options for you, solo biz owner:

1. Traditional or Roth IRA

One way an individual with earned income can start saving for retirement is by contributing to a Traditional or Roth IRA. Individuals have until April 15, 2017 to make a contribution for the 2016 tax year. For 2016, individuals can contribute up to $5,500 ($6,500 if you’re age 50 or older) or their taxable compensation for the year, if their compensation was less than this dollar limit. However, a Roth IRA contribution might be limited based on tax filing status and income.

Roth IRAs are great because you can withdraw your money tax-free when you’re in retirement. Contributing to a traditional IRA, on the other hand, earns you an income tax deduction. However, that deduction may be limited if you or your spouse is covered by a retirement plan at work and your income exceeds certain levels. Review the IRS guidelines for more details.

Also, if you’re a new business owner, you may find yourself in a lower tax bracket than when you were at your corporate job. (Not for long, I hope!) That means it might be a good time to convert an old 401(k) or traditional IRA into a Roth, where you can capture lower taxes today and withdraw that money tax-free when you’re in retirement.

If you have more money to contribute to retirement than $5,500 ($6,500 if you’re age 50 or older), then you may want to invest in one of the following retirement accounts.

2. The Solo 401(k)

The Solo 401(k) is a traditional 401(k) plan covering a business owner with no employees, or that person and his or her spouse. A business owner can make the following contributions:

  • Elective deferrals of up to 100% of earned income up to a maximum annual contribution of $18,000 in 2016, or $24,000 in 2016 if age 50 or over; plus
  • Employer non-elective contributions up to 25% of compensation, with total contributions not to exceed $53,000 for 2016.

Note that these elective deferral limits apply per person, not per plan. So if you’re also participating in another employer’s 401(k), say if you’re starting your business while still employed at a corporate job and making 401(k) contributions to take advantage of an employer match, these will count against the limit for employee contributions to an individual 401(k) or IRA.

Also: A Solo 401(k) plan is generally required to file an annual report on Form 5500-SF if it has $250,000 or more in assets at the end of the year. A solo 401(k) with fewer assets may be exempt from the annual filing requirement. If you choose to go this route, your solo 401(k) must be set up by December 31st and funded by your tax return due date in order for contributions to apply for that year.

3. Simplified Employee Pension Plan (SEP IRA)

A SEP IRA is like a traditional IRA, but it is funded solely by employer contributions. A business owner sets up an IRA for each qualifying employee and can contribute up to 25% of each employee’s pay (and 25% of net self-employment income). Annual contributions are limited to the smaller of $53,000 or 25% of compensation for 2016. There are no “catch-up” contributions like the solo 401(k).

The SEP IRA is a great option for those who do not qualify for a solo 401(k), or who have employees and are looking for a retirement plan for their company. Business owners just need to file a form with the IRS (Form 5305-SEP) and open a SEP IRA at a bank or financial institution

How to choose your retirement account as a solo business owner

Which tax-advantaged retirement plan should you use? That depends on the nature and size of your business. (Do you plan on hiring employees in the future?) Additionally, you need to consider your tax filing status, age, and participation in other retirement plans. Since some plans require more administrative and fiduciary responsibilities, you may want to chose one retirement plan over another due to simplicity.

Pay yourself first!

Finally, in order to reach your financial goals, start by paying yourself first. This is important even if you aren’t a business owner! You can achieve this by setting up automatic transfers to your savings, retirement, and/or investment accounts. As an entrepreneur, your income may vary, so allocate your savings based on percentages instead of dollar amounts. For example, make it a goal to set aside 5% of every client payment. This will automatically help you save more dollars when your income is higher and keep you from overextending yourself during leaner months.

When it Comes to Tax Time, Here’s How to Avoid the Panic Like a Boss

April 15th strikes fear into the hearts of many entrepreneurs, and for good reason -- once we’ve worked hard at becoming profitable, the last things we want to think about are tax payments, CPA prep fees or (gasp!) being audited.

I see that glazed-over look of “tax-time horror” on the faces of my coaching clients often. But based on my background as an accountant and auditor, I can attest that tax time is much less stressful if you’ve already conquered half the battle: having organized documentation. On April 14th, you don’t want to be scouring the depths of your purse for a receipt from that one expensive bill paid way back in January.

Now, tax time may have come and gone for this year (phew), but there’s no time like now to start making things easier for the next go-around -- especially because the panicked search detracts from your peace and can be circumvented easily.

Even better? Getting your documents organized can be fun, manageable and save money. So, if you’re cringing at the thought of calling an accountant, staring at piles of old receipts or just putting it all off until the last minute (again), I have a few simple, actionable tips to get your critical items in order so you can get on with the business of being a solopreneur #bosslady.

Ready? Let’s do this.

Make organizing fun and manageable

Some of us love to be organized, and some of us don’t. But here’s the key: The more organized you are during the year, the smoother your tax season can be. Whether you’re already behind, with your receipts piled up in a drawer for “later,” or you’re just getting started in biz, approach it the same:

  • Pick up colorful file folders and use your favorite Sharpies/pens to label them with descriptions of the file contents (cable bills, pay stubs, bank statements, etc.)
  • Grab a pile of receipts/invoices/forms and start organizing them into the appropriate folders

Are you all about digital file-keeping? Google Apps or Dropbox are great options to hold your documents. Both have free versions, offer file-sharing to others (like your accountant), can be used on your mobile device and can even be color-coded, just like those handy, physical file folders.

If you’re looking for a service that does more than simply house shareable documents, Shoeboxed offers IRS-accepted receipt organization, automatic archiving of invoices from Gmail and even a GPS-enabled app to track your vehicle mileage. This option has a free 30-day trial with subsequent payment plans currently starting at $9.95 per month.

Organizing your receipts and files can be accomplished while watching TV or listening to a podcast if you have a larger chunk of time, or gradually over the course of a week if you only have a few minutes each day. Breaking it down into a few minutes each day or combining it into another activity (hello, Netflix!) helps it feel more manageable.

Bonus points: Keep both a hard copy of all documentation and an electronic copy in at least two places. Proving income and expenses to the IRS could be a mini-nightmare if you lose the only copy of your detailed receipts. (Editor’s note: Scan your receipts in with your phone using a handy app like CamScanner!)

How to organize receipts + files within your folders

For the most user-friendly filing system, group your files into categories that would mimic your financial statements (revenue and expenses). For example, a revenue folder might contain sub-folders containing documentation for:

  • Commissions Earned
  • Income from affiliate programs
  • Tips Earned
  • Advertising Income

Similarly, an operating expenses folder would contain sub-folders for:

  • Payroll and Related Fees
  • Vehicle Mileage and Maintenance
  • Meals & Entertainment
  • Advertising Expenses
  • Software and Technology Service Fees

Grouping files into categories allows an accountant to more easily and accurately find what they need to file your returns. And in the event of an IRS audit, it could save you many stressful hours of digging through a stack of uncategorized files.

Organizing saves money

Another reason to organize your records: It can save you money. Having a brief summary of the year’s transactions can work as an excellent bargaining tool for reduced tax prep fees because most CPAs prefer getting a neat, concise schedule instead of a shoebox full of coffee-stained receipts. (A quick reminder: An accountant compiles the information; the IRS audits it.)

I highly recommend my clients regularly export their online financial account activity and maintain an electronic copy. Then, when tax time rolls around, they can easily summarize the year’s financial data to hand off to their accountant.

To do this, you can use budgeting or banking apps, or if you want to get nerdy with it:

  • Export online checking/savings account activity to Excel
  • Add a pivot table to the data in Excel (learn how to do it here or here)
  • Set up the pivot table to summarize by type of transaction, vendor, etc.

I am in love with using pivot tables on my exported Excel-format banking info because it provides 1) a quick summary of income and expenses by type for your accountant to use in tax filings, and 2) the underlying detailed transactions you would need if audited by the IRS.

If you use Freshbooks, Wave, or other bookkeeping apps, you can export reports, as well.

Getting your records organized can not only work as leverage for a potentially reduced tax prep fee but also illuminate forgotten expenses that help offset some of the year’s income, effectively helping to reduce your tax liability.

You can do this (really!)

The simple take-away: Organizing your tax records is 100% manageable, can save you precious dollars to reinvest in your business and can even be enjoyable when approached creatively. Give it a try and see if it provides some ease to your process. Happy tax season!

What were your greatest tax season pains this year? Leave them in the comments!

PS -- Feel like it might be time to learn more about those solopreneur finances? Check out Solopreneur Finances, a course we co-created with Carrie Smith of Careful Cents -- that just happens to be included in the One Woman Shop Bundle!

Accounting Jargon, Decoded for the Solopreneur

solo business logistics
 
As solopreneurs, we wear many hats in our business: customer support, copywriter, salesperson, and CEO. As we bounce from field to field trying to get our tasks done, we’re often bogged down by industry jargon. And the worst part of jargon is this: We get sucked into a rabbit hole of research trying to understand how these complex terms relate to our business.

One of the industries that is chock-full of jargon is the accounting and finance industry. In my opinion (and I think you might agree), it sometimes feels as though they’re just trying to overcomplicate things. Here’s looking at you, IRS.

This became especially apparent recently, as I was working with my friend Jenny on the launch of a new service, adding in-home cooking classes to her current catering business. As she was trying to work through the financial side of things, she kept running into over-complex formulas and explanations that didn’t relate to her solopreneur business.

We worked through her questions and I gave her basic explanations of some of the most important accounting terms, how to use them in her business, and why she should be sure to look at these items. I thought maybe an explanation could help you, as well.

Here are the main accounting topics we worked through and examples of how these relate to her new service launch:

Fixed costs

  • What it is: Costs that will not change, regardless of how much you sell (rent, website hosting, utilities, salaries, etc).
  • Why it’s important: Fixed costs are often overlooked but they can creep up and quickly take a big bite out of your profits.
  • When you should review it: Monthly, to make sure your costs aren’t creeping up

As this is a home-based business and an extension of an existing business, Jenny’s fixed costs aren’t too high. They include things like her website hosting, her advertising budget, and her own salary. We were able to estimate that her fixed costs would be approximately $2,500/month.

Variable costs

  • What it is: The cost you have when you actually sell a product (materials, hourly wages, shipping, etc).
  • Why it’s important: Without knowing your complete variable cost, it can be very difficult to price a product or service appropriately.
  • When you should review it: Also monthly, to make sure your costs aren’t creeping up

For Jenny, included in her variable costs is the food she buys for each cooking class as well as payment to the assistant she hires on an hourly basis to help with each class. We concluded that her variable costs total for each student is $20.

Contribution margin

  • What it is: Sales (income) from each product or service sold minus variable costs.
  • Why it’s important: This will tell you how much money from each item that you’ve sold can be used to cover other costs (like fixed costs). I use this as my first test to see if I’ve priced things high enough.
  • When you should review it: When reviewing your pricing or launching a new product/service

Jenny charges $60 per student and her variable cost per student is $20, leaving her with a contribution margin of $40 per student ($60 - $20). That means that for every student she has in class, $40 can go toward covering her fixed costs and hopefully making a profit!

Breakeven

  • What it is: The point where you have sold enough you are no longer losing money. To get this, you’ll take your fixed expenses each month and divide by your contribution margin.
  • Why this matters: This one is seriously a big deal. This is the point where you will either have a business that makes money each month, or loses money each month.
  • When you should review it: Also when reviewing your pricing or launching a new product/service

Jenny has pretty low fixed costs since she’s running a home-based business. Her breakeven point each month is $2,500 fixed costs / $40 contribution margin = 62.5 students each month. This means that in order for her business to not lose money, she needs to have approximately 63 students in her classes each month. If she sees more than 63 students in a month, she’ll have a profitable business.

Return on investment (ROI)

  • What it is: When you spend money, or invest, in a business you want to be sure that you’re making that money back, and then some. How you measure that is by using the return on investment. It is the sales you received from an investment minus the cost to fulfill those sales, divided by the cost of the investment.
  • Why it’s important: Use this calculation to make sure that the money that you’re spending on your business is working for you.
  • When you should review it: Before making an investment in your business such as new equipment or a marketing campaign

To advertise her new classes, Jenny is doing a sponsored post with a local food blogger that has a significant following in her city. The cost of the sponsored post is $750 and Jenny hoped that she could bring in 40 new customers from it. With that estimation her return on investment would be:

40 customers * $60 income per customer = $2,400
40 customers * $20 cost per customer = $800
($2,400 - $800)/$750 = 2.13

In other words, for every $1 that she spends on the advertising campaign she expects to get $2.13 dollars back. A pretty solid investment.

Understanding accounting jargon

At first overwhelming, these accounting numbers can be used pretty easily to evaluate your revenue and costs, and help make pricing decisions for your solo business. While accounting certainly isn’t the most fun aspect of the solopreneur lifestyle, having a foundational grasp on things like fixed versus variable costs, break even and contribution margins, and return on investment can help make sure you’re growing a healthy business that is paying you what you deserve.

Breaking Through Mental Money Barriers as a Solopreneur

There’s a lot to learn when getting started as a solopreneur. But with so many great resources that can help you, step-by-step, to start and grow your business, it should all just be easy breezy, right?

Not so much. So often, when it comes to actually putting what we’ve learned into action, we just get stuck. For solopreneurs, money is often one of those places where we feel ourselves trudging through mud.

What’s keeping you from moving forward to earn what you deserve? You may think lack of time, or maybe lack of knowledge. But so often, it’s the mental money barriers we unintentionally put up. Yep, mental money barriers are real and they’re keeping you from becoming the awesome business person you’ve dreamt of becoming.

So what’s an ambitious business owner like you to do? Identify your mental money barriers and create a strategy to get past them. Read on to see how you can move past four common mental money barriers -- because earning money as a business owner is as much about mentally getting into the game as it is learning the skills to run your business.

Money barrier #1: Don’t like the idea of charging? Create an epic value proposition.

Do any of these quotes sound familiar?

  • “I struggle with the idea of charging my customers for this product/service.”
  • “I don’t want to seem like I’m selling all the time.”
  • “It’s okay to give a friend (or a friend of a friend of a friend) a discount.”

For most people, myself included, the actual act of selling products or services makes their skin crawl. We picture pushy salespeople and disappointed customers. The concept of selling is intimidating, often leaving entrepreneurs significantly undercharging for their services.

It’s time to bury that barrier by creating an epic value proposition: a statement that clearly lays out what value you are providing to your customer with your product or service.

While many people use their value proposition to attract their customers’ attention, another way to use this is to get over your money barrier. When you focus on the value you are delivering your customer, you are mentally taking the emphasis off charging people and replacing it with the value you are delivering.

There no one way to create a value proposition, but author Geoffrey Moore provides this easy template to start with:

For (target customer) who (statement of need) our (product/service name) is (product category) that (statement of benefit).

A nutritional coach might frame their value proposition as: for busy working mothers who don’t have time to eat a healthy breakfast, my product is a book of 3-minute breakfast recipes that make eating a nutritional breakfast easy to work into their morning routine, giving them the great start to their day that they deserve.

Writing a value proposition is not an exact science, but the key is to focus on the amazing value you are creating for your customer.

Money barrier #2: Struggle spending money to invest in yourself and your business? Adopt an abundance mindset.

As entrepreneurs, most of us know what it’s like to pinch pennies and debate spending money as we work to get our business off the ground. While that’s not a bad thing, it can lead to a scarcity mindset, creating a money barrier that stands between you and the leveling up you deserve.

In the scarcity mindset, we focus on short term results and only having a limited set of resources. In contrast, the abundance mindset is focused on long-term growth and endless opportunities to grow.

To move into an abundance mindset in your business, stop looking at money spent on your business solely as expenses, and consider them as investments.

To be clear, moving out of a scarcity mindset and into an abundance mindset isn’t about spending recklessly and viewing everything as an investment. It’s about carefully considering the expense and measuring whether it is a true investment that is going to grow you or your business.

The next time you are considering spending money on something and you begin looking at the cost, take a minute to think about what it could potentially bring you. Will an improved inventory system help you ship more products? Will that course or mastermind help you move past a business plateau? It’s these important distinctions that can help break the scarcity money barrier.

Money barrier #3: Feel uncomfortable with the idea of becoming wealthy? Define your goals with a purpose.

Money gets a bad rap. There are so many bad examples of wealth and greed, that many of us unconsciously put up money barriers to keep ourselves from becoming wealthy. You might think this barrier doesn’t apply to you, but before you dismiss it, fill in the blank below to reflect on what wealth means to you.

Being rich/wealthy looks like ______________.

If the image that you come up with is primarily negative, you might have a money barrier related to becoming wealthy.

To move past the negative image, work on defining goals with a purpose. While most of us will set goals for our business related to how much money we want to make, try adding a purpose to create a new image of wealth.

For example, if you want to grow your business to have profit of $150,000 per year, what does that amount mean to you? Does it mean that your partner is able to quit their job? Or perhaps it’s that you’ll be able to spend more time with your family or contribute to a cause you love.

Spend time defining that purpose to create your new image of wealth. Write it down and keep it somewhere you’ll be able to see regularly.

Money barrier #4: Avoid mundane (but necessary) money tasks? Create a powerful habit.

When I started my first business, I was a pro at avoiding the mundane money tasks like invoicing, logging expenses, and just keeping things generally organized. I would procrastinate for as long as possible, making up excuses that it wasn’t as important as other things on my list, or that I wasn’t in the mood to do it.

And the longer I put it off, the larger these mundane tasks became. I had created a horrible mental money barrier with all of my excuses, which ended losing me quite a bit of money.

To break this, I created a weekly money habit. I know that a weakness of mine is logging receipts and sitting down regularly to go through my books. I also know that Friday afternoons I’m not up for anything requiring much brainpower. So I decided to create a money checklist and go through it for 20 minutes every Friday after lunch. The first few weeks of sitting down to do it were tough, but after a month these actions clicked and I began automatically doing them right after lunch every Friday -- no excuses.

To stop avoiding your necessary money tasks, create a checklist of the items you want to complete weekly and set a time do it. I recommend creating a list of items that will take 15-30 minutes to complete to start. To create an actual habit, tie it to something specific that you do every week. When you do that first action (for me, Friday lunch) it triggers my habit of completing my money checklist.

Break past the mental money barriers to grow your business

There may be other money barriers that are standing in your way (shout them out in the comments!), but the key to not letting them hold you back is to recognize that they exist and create a plan to move past them.

Finance & Taxes #OWSchat Recap

Solopreneur Finance E-Course is Here!

Solopreneur Finance e-courseLet’s face it: we jump into our side hustles and solopreneur endeavors because we’re ridiculously passionate about something and want to spend our days doing it. Oftentimes, that something doesn’t include the logistics like keeping the books, invoicing clients, paying estimated taxes -- you know, the fun stuff.

Well, luckily, that stuff IS fun for some people -- and Carrie Smith of Careful Cents happens to be one of them! That’s why we couldn’t think of a better expert to collaborate with to produce a course for the One Woman Shop community on finance for solopreneurs.

Solopreneur Finance: Managing Money On Your Own Terms is a 12-week, virtual course that we've designed for you via CourseCraft.

Throughout the course, you’re going to get your questions answered when it comes to:

  • How to break the status quo and make money "rules" that work for you
  • How to best set up your business in terms of legal designations and what that means for your financials
  • The key elements of DIY finance
  • How to hire a bookkeeper if and when the time comes
  • What systems you should have in place before growing your business
  • When it's time to pay taxes, and how to go about it

...and that's not even the half of it. We went to great lengths to cover the topics that will most benefit One Woman Shops from day one to day 1,000, and well beyond.

This course is all about you - how to manage your money, while balancing many other aspects of your solopreneur business -- on your own terms. It’s about finding the “rules” that fit your business.

Most importantly, by taking in the material and completing each week’s action, you’ll come out with the confidence to own your finances as a solopreneur -- just in time for that dreaded tax season!

Here’s how you get it:

The course is free to One Woman Shop members -- and your access begins today! Simply visit the course page, click “Enroll,” and put in the code that was emailed to you today.

Not a One Woman Shop member yet? Click here to apply for membership, or visit the course page and enroll via Careful Cents for $77! Use the code OWS10 at checkout to get 10% off.

Questions? Shoot us an email. It’s time to own your finances, solopreneurs!