Many of our clients who retire from large technology companies or start-ups have been approached with opportunities to consult or serve as a board member. While it’s tempting to step away from work entirely, there are several reasons why setting up a business and taking on part-time work may be beneficial for your overall retirement plan. For instance, being self-employed may grant you to access to more comprehensive health insurance coverage or enable you to do a mega backdoor Roth IRA conversion. It can also help ease your transition into full retirement both from an emotional and financial perspective.
1. Access Group Health Insurance in Retirement
One of the top concerns of those nearing retirement is obtaining and paying for health insurance coverage. Most retirees who are not yet eligible for Medicare opt to utilize COBRA for 18 months through their former employer before turning to the individual health insurance market. In general, most individual health insurance plans have higher deductibles and less comprehensive coverage when compared to employer-provided group plans. Individual plans tend to limit coverage within the state of your primary residence, which poses complexities if you want to spend summers in one location and winters in another. Individual plans typically require referrals from your primary care physician, as opposed to group plans which allow for self-referral. Group plans also tend to include a broader range of providers in their networks. For these reasons, obtaining access to a group health insurance plan is highly appealing. Group plans can provide you with better options and more comprehensive coverage.
In the state of Washington, you can gain access to this type of coverage through a “micro group” plan, which is defined as a group plan covering one to three employees. To qualify, you must set up a business within the state of Washington and provide a W-2 reflecting your self-employment income from the previous year. Not all self-employed people pay themselves via a W-2, therefore if you want to access this type of health insurance, you’ll likely need to set up an S Corporation which issues a W-2.
Note: there are pros and cons to setting up an S Corp. It’s important to review the options of your business entity with your CPA. Also, group health insurance plans may not be less expensive than what you find on the individual market, but the benefit is generally broader coverage.
2. Completing a Mega Backdoor Roth IRA Conversion with No Tax Implications
Another benefit of being self-employed is utilizing a self-employed 401(k), also known as a solo or individual 401(k). This type of retirement plan enables you to defer a portion of your pre-tax income into a 401(k) plan, similar to the one your employer may have offered. If you have a traditional IRA that includes pre-tax and after-tax contributions earned after your income exceeded the limit where contributions are deductible, this can be a significant opportunity. You can move the pre-tax dollars from your Traditional IRA into your self-employed 401(k). Once your IRA contains only after-tax dollars, you can convert this balance to your Roth IRA tax-free (be careful not to roll any other pre-tax contributions into your traditional IRA in the same tax year that you complete the Roth conversion). The ability to complete a tax-free Roth conversion is a significant tax benefit. Additionally, you may be able to defer up to $61,000 per year ($67,500 for those over 50 years of age) pre-tax into your self-employed 401(k) – further boosting your savings and better securing your retirement plan.
3. Ease the Transition from Full-time Work into Full-time Retirement
Even if you’ve been diligent about mentally and financially preparing for your retirement, many people are hesitant to give up their primary source of income. Stock market declines suddenly become much more nerve-racking, and the need to track spending can cause concern when you have been accustomed to freely spending while working. Even with thoughtful financial planning, some still find it difficult to achieve peace of mind during this transition. Having some part-time income after retirement can help ease these concerns and cushion your retirement plan. It also allows time for you to develop hobbies and a new routine to replace the one your work-life held for so many years.
If you’re considering self-employment after retirement, it’s important to discuss business structure with your CPA and attorney to make sure you’re properly set up. Doing so may enable you to access various health insurance coverage, continue building your retirement savings, and help ease the stress around this big step for those choosing to retire early. Your Coldstream wealth management team is here to help you work through your retirement plan, determine sustainable spending, and recommend an appropriate portfolio allocation to support your retirement goals. Please reach out to us to discuss any of these ideas.