3 Investing Secrets Most Entrepreneurs Don’t Know About

One incredible way that entrepreneurs can earn money beyond their business is by investing. Depending on what stage you are at in your entrepreneurial journey, there are different ways to invest your money to get the biggest bang for your buck.

Not only can investing allow you to make a ton of money, but it can also be your key to saving thousands of dollars every year. If that sounds too good to be true, check out these three tax benefits that can come in handy for entrepreneurs seeking to rack up on investment wins.

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1. You can open a retirement account for self-employed individuals

For most people, going from employee to entrepreneur means you have to kiss the coveted employer-sponsored retirement plan goodbye. But that doesn’t mean you can’t open your own retirement account to invest your money.

Self-employed individuals can boost their retirement savings with an individual retirement account (IRA) made especially for their business activities. There are vehicles like a Simplified Employee Pension (SEP) IRA that may allow you to make tax-deductible contributions throughout the year. This account allows you to reduce your tax bill, invest in your favorite assets, and grow your retirement stash.

Similar to other retirement savings accounts, there’s a cap on annual contributions. For 2021, you can contribute up to 25% of net earnings from self-employment, but your total contribution cannot exceed $58,000.

2. You can contribute to a Roth IRA

Saving for retirement doesn’t have to stop at employer-focused accounts. A smart way to grow your nest egg tax-free is through a Roth IRA. And to be clear, you can still contribute to a Roth IRA even if you’ve opened and contributed to a SEP IRA.

Here’s a quick primer on how it works. Roth IRAs are funded with money you’ve already paid taxes on. For 2021, you can contribute up to $6,000 per year if you’re under 50. There’s a $1,000 catch-up contribution available to taxpayers 50 and older.

When the funds hit your account, you can go shopping for your favorite stocks or hold the money there until you’re ready to invest it. The Roth IRA has stolen the hearts of many investors because your money grows tax-free. When you reach age 59 1/2 and have held the account for over five years, your withdrawals will also be 100% tax-free.

A Roth IRA could be a great retirement investment vehicle for entrepreneurs who fall within the income range. It’s also an easy account to gain access to if you have earned income for the year. But as soon as your business takes off and you exceed the income requirements, you won’t be eligible to make direct contributions to a Roth IRA. However, you can still join the tax-free retirement account club through a Backdoor Roth IRA if you’re a high earner.

3. You might qualify for tax credits

If you need another reason to save for retirement, the Saver’s Credit may provide an ounce of motivation. This IRS incentive encourages low- to moderate-income taxpayers to save for retirement through a tax break.

If you contribute money to a qualified retirement plan, you may be eligible for a credit up to $1,000 ($2,000 if you’re married filing jointly) that can reduce or wipe away your tax bill. There are three credit amounts you may qualify for: 50%, 20%, and 10%. Your credit is based on your adjusted gross income (AGI) and filing status for the year.

Let’s say you have a total AGI of $19,000 and contribute $6,000 to a Roth IRA. As a single filer, the maximum contribution amount that the IRS will consider for credit purposes is $2,000. Because the income falls within the range for the “50% of your contribution” credit, you are entitled to a $1,000 Saver’s Credit. A married couple can make up to $4,000 in eligible contributions that can lead to up to a $2,000 credit.

Take a look at the chart to see how it all works.

2021 Saver’s Credit rate and AGI eligibility by filing status

Credit

AGI (Married Filing Jointly)

AGI (Head of Household)

AGI (All Other Filers)

50% of your contribution

$0 to $39,500

$0 to $29,625

$0 to $19,750

20% of your contribution

$39,501 to $43,000

$29,626 to $32,250

$19,751 to $21,500

10% of your contribution

$43,001 to $66,000

$32,251 to $49,500

$21,501 to $33,000

Not available

Over $66,000

Over $49,500

Over $33,000

Data source: IRS.

Grow your investment portfolio

There are many ways that entrepreneurs can boost their investment portfolio, including tapping into a taxable brokerage account that gives you the freedom and flexibility to withdraw your money without penalties.

In order to identify the best moves to make, you should review your goals periodically. There are tax benefits you can take advantage of no matter where you fall on the income scale. If you have the opportunity to invest money in a retirement account, you can end up with double rewards: Incredible tax benefits and a handsome nest egg.

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