One of the toughest things to do as an independent service professional is create a retirement plan. Many stylists, trainers, barbers, and spa professionals are independent contractors or work for a small, independently-owned business. Consequently, these types of employment rarely include traditional benefits, such as PTO, health insurance, and a retirement 401(k) plan. But that doesn’t mean that you’re doomed to work forever! Right now, while you’re in the prime of your career, it’s the perfect time to start laying a solid foundation for your future. There’s no getting around the fact that in the beauty and fitness service professions, a lot of your working capital is tied up in operational expenses, making it difficult to set money aside. Here’s how hairdressers, barbers, nail techs, spa and fitness professionals can start planning for a comfortable retirement, without stressing about the future.

What is a 401(k)?


A 401(k) is essentially a savings account funded via pre-tax payroll deductions, named after the IRS code describing it. The funds in a 401(k) are available for investment in mutual funds, stocks, bonds, and other assets. Funds in a 401(k) are not taxed on interest, dividends, or capital gains until they’re withdrawn. Initially, 401(k) plans were created as a supplement to traditional pensions but have evolved into the US standard for retirement savings. One of the main advantages of the 401(k) is that for many traditional employment models, employers match employee contributions to the fund. 401(k)s are also quite flexible in terms of how their funds can be invested, as well as being portable from job to job through rollovers. Though the drawback for small business owners and independent service professionals is that 401(k) plans are not generally offered by employers in the beauty and fitness industries. However, there are other savings plans better suited to the employment structures of these industries that empower you to save for your retirement!

You’ve Got Options


For self-employed stylists, trainers, or owners of beauty or fitness small businesses, there are alternatives to the 401(k) that’ll help you save for retirement and reduce your taxable income. For small business owners and employees of Limited Liability Corporations (LLCs) or sole proprietorships, some of the plans listed below may give you a jump-start on your retirement plan! To determine which options are right for you and your business, contact a tax professional to review your options in more detail.

1. SEP (Simplified Employee Pension) Plan


A Simplified Employee Pension (SEP) plan is best-suited for small businesses with fewer than 100 employees or for independent professionals such as personal trainers or booth renters. SEP plans offer a basic method for setting aside pre-tax savings, allowing up to a 25% contribution of your net self-employment income. Here, it’s important to note that a SEP IRA can’t be a Roth IRA. For a small business owner, the drawback to a SEP plan would be if you employ hourly or commission-based employees rather than independent professionals or booth renters. This is because the money deposited into a SEP is counted as an employer contribution, and the same percentage contribution must be made for all eligible employees.

2. SIMPLE (Savings Incentive Match Plan for Employees)


Like the SEP plan, the SIMPLE IRA is designed specifically for small businesses with fewer than 100 employees or self-employed professionals to offer as a benefit of employment. This plan allows employees to contribute part of their salary and requires employers to contribute for eligible employees. The paperwork is simple, but the penalties are higher for early withdrawals. It’s also important to note that this plan isn’t structured for independent contractors who already have maximized contributions to a traditional 401(k) from another employer.

3. IRAs (Individual Retirement Account)


Individual Retirement Accounts (IRA) or Roth IRAs allow you to save a certain amount of money annually into a designated account. The key difference between an IRA and a Roth IRA is that a traditional IRA allows a tax deduction for your contribution, while with a Roth IRA, contributions are made from after-tax income. Each type of IRA has its own advantages and drawbacks, including certain withdrawal exemptions (such as towards education or home purchases) and tax break qualification.

4. Qualified Plans (H.R. 10, Keogh Plans)


Other qualified plans (HR 10 or Keogh plans) are tax-deferred pension plans available to self-employed professionals or unincorporated businesses like sole proprietorships or partnerships. Most of these plans are structured as defined-contribution plans and are generally tax-deductible up to a certain percentage of your annual income. Here, it’s important to note the distinction between self-employed vs. independent contractor, as independent contractors can’t set up or use these plans toward retirement as you would with a SEP plan or a 401(k).

5. Solo 401(k) Plans


A single-participant (Solo, Solo-k, Uni-k) 401(k) is essentially a traditional 401(k) plan that covers a business owner with no employees. This 401(k) has the same rules and requirements as a traditional 401(k) provided by an employer. These offer generous contribution limits, low set-up and annual fees, and optional contributions amounts. That means you’ll be able to contribute more during a good year, with no penalty for lower or no contributions during leaner years. You can also roll over an established 401(k) from a previous employer into a solo 401(k), ideal for professionals who’ve recently made a career change.

How to Get Started


Before you decide to start any type of retirement savings, it’s always best to set a solid foundation first. They say the journey of a thousand miles starts with one step. Here, the first step is simply making a plan to have a plan. The easiest way to begin is by starting a dedicated savings account with your bank or credit union. Savings accounts have low requirements for your initial deposit, are easy to access if you have an urgent need for funds, and they accrue interest. By establishing a savings account first, you’ll be better able to estimate and forecast what kind of contributions you can make to a retirement plan. Next, you’ll want to take steps to paying down or paying off any outstanding debts you may be holding. By paying down high-interest debt, you’ll free up more money to invest toward your retirement. Finally, don’t go it alone! Consult a financial planner to help you figure out which plan is right for your income, employment, and long-term goals.

Additional Resources


We’d love to know what steps you’re taking to planning your retirement. Tell us your best tips and tricks for creating a retirement plan and making sure you’re saving for your future!

P.S. If you own or manage a business that charges rent and fees, learn more about how you can do that with Vagaro’s new Automatic Rent & Fees feature.


Header Image: @ElleAon via Twenty20

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