There are so many reasons why massage therapists become self-employed. Most say it is the freedom to be creative, the freedom of time, and the freedom to be your own boss. But when it comes to an employee benefits package—including a 401K, retirement and health savings plan—you may lose such benefits while gaining entrepreneurial freedom.
Don’t worry—all is not lost. You have options. As a self-employed massage therapist, you can still have these essential savings plans.
Unfortunately, some massage therapists forget about these critical saving vehicles as they build their massage business. Some may look at such plans as taking money they do not have, especially when they are just starting out. Others may look at this form of saving for the future as something they can think about later.
The key is to fully understand your options and include these expenses—health care and retirement costs—into your budget. Think of these expenses as elements of your self-care.
Retirement is the time in one’s life when one decides to stop working for good, thus saving for retirement is a long-term self-care plan. Health care costs often increase as we get older. When you stop working, you will still have expenses. Bills do not stop incurring because you stop working. You still need money to pay bills and enjoy life.
So, what are your options when it comes to retirement? What are your options for health care coverage as a self-employed massage therapist? Before discussing options, let’s first define standard terms often used when one talks about retirement and health care plans.
Types of Plans
401K: The 401K is a retirement tool. It is a saving and investing plan offered to employees by their employer. A portion of the employee’s pre-tax income is taken out of their paycheck and contributed by the employee into investment funds. Such contributions are often matched by the employer.
IRA (Individual Retirement Account): As retirement tools the IRA has multiple options:
Traditional or Roth IRA: Both allow you to roll over your old employer’s 401K retirement plan into one of these IRA options. Most massage therapists who are just starting out opt for this option, as it is the easiest to start, and you can use it regardless of whether you have employees.
The primary distinction between a Roth IRA and a Traditional IRA is the manner and timing of tax breaks. Traditional IRA contributions are tax-deductible, but retirement withdrawals are taxable. In contrast, Roth IRA contributions are not tax-deductible, but retirement withdrawals are tax-free.
SEP (Simplified Employee Pension) IRA: The SEP is another individual retirement account (IRA) that can be established by either an employer or a self-employed person. The employer is eligible to take a tax deduction for contributions made under this plan. The employer also has the option of making contributions to the retirement plans of each employee who is suitable for the plan.
However, the employer is not allowed to use SEP to save money for just themselves; if they contribute for the year, they must make contributions for all eligible employees. These contributions must be equivalent to those they make for themselves, not in terms of the dollar amount but rather as a percentage of pay.
Health Care Coverage
Health Savings Account (HSA): a saving tool that allows you to contribute money to this plan that can be used to save for health expenses such as prescriptions, co-pays and deductibles. In essence, HSAs enable individuals or their employers (or both) to make tax-free contributions to an account.
A self-employed massage therapist must have a high-deductible health plan to be eligible for a self-employed HSA. Like everything else in life, this plan has rules, regulations and exceptions, and don’t be afraid to ask your health insurance provider about them.
High Deductible Health Plan is a health plan that has a lower monthly premium but higher out-of-pocket costs, which include co-pays, deductibles and prescriptions.
Your Unique Circumstances
As you read this article, you may be asking yourself another question: “How do I decide what plan is good for me?”The proper self-employed retirement and health plan depends so much on your individual circumstances, which is why it is important that you speak with a certified financial planner and your certified public accountant.
Scenario #1: Natalie, a massage therapist with no employees other than her spouse, can set up a self-employed 401K plan. This plan is also called an individual 401K or a solo 401K. This retirement savings plan allows participants to contribute money from their income before taxes.
This money can be invested in various ways to grow tax-free until it is taken out at retirement. Within this plan, Natalie can save more each year than she could in a traditional 401K, IRA or other small-business retirement account, because she is acting as both employer and employee.
Scenario #2: Becky has recently left her job as a licensed social worker, which offered a retirement plan that was sponsored by the employer and to which she made bi-weekly contributions. After getting licensed as a massage therapist, she opened her own massage business. Although she changed industries, Becky can easily roll over her old 401K plan into a Traditional or Roth IRA.
Scenario #3: Robert is a newly self-employed massage therapist. He knows that being a massage therapist can be hard on his body; thus, he needs to have health insurance coverage. Sadly, health care is costly, so Robert decided to call a few health care insurance providers and explain his health status and financial situation. He ultimately decided to choose a high-deductible plan that allows him to have an HSA. He knows that if his financial situation changes or his health needs change, he can change his health plan.
Questions for You
Keep in mind that saving for retirement and health costs are not things that can be decided overnight. Nevertheless, you should not drag your feet. Just as no two massage businesses are alike, retirement goals and health care coverage are unique to each massage business owner. I recommend that you think about the following questions as you decide on what path to take:
- How much do you think you need to retire?
- How much financial risk are you willing to take now?
- What are your financial goals, besides retirement?
- At what age do you want to retire?
- What is the minimum amount of savings you need to have before withdrawing?
- How much does it cost to get health care when you’re retired?
- How much taxes will you need to pay when you withdraw?
- What are the most significant threats to your financial well-being during retirement?
- How healthy are you now?
- What can you do now to keep your health care costs low?
Build a Team
Self-employment decisions are not easy, so it is vital to have a financial team. Retirement plans have limits, which include income, contribution and age. These limitations can change every year. Your certified financial planner and certified public accountant will know the specific numbers of these limitations and the rules and regulations for your retirement options.
These financial professionals can help you build a saving plan that fits your future needs and goals:
Certified Financial Planner (CFP): A CFP offers assistance to individuals, including self-employed massage therapists, in a variety of facets of the management of their personal finances, including retirement, investing, education, insurance and tax preparation.
Certified Public Accountant (CPA): A CPA is a credible financial advisor who assists individuals, businesses and other organizations in setting and achieving their monetary objectives. CPAs can be found in all industries. They provide consulting services on various topics, including accounting and taxation. When it comes to assisting you in making wise investments, a CPA, in conjunction with a CFP, can significantly help you.
The key to saving and preparing for the future is planning. Every little bit helps. The money you save now will help you live comfortably in the future. Who wants to work forever? The journey does not have to be stressful or overwhelming if you reach out for assistance and think about your future goals.
When sitting with your certified financial planner and certified public accountant, be familiar with the above common terms and have answers to the above questions. You may not have all the answers, but you can discuss these questions with both your certified financial planner and certified public accountant.
As you answer these questions, write down any other questions that come to mind. Planning for the future is not set in stone; your retirement goals may change as life circumstances change. Nevertheless, having a plan in action can help with any future changes. The earlier in life you begin preparing for your golden years, the better off you will be.
About the Author
Lozelle Mathai, MBA, CFEI, is a financial accountant with over 18 years of experience in the field of financial management and accounting. She is the owner of The Body of Accounting, a division of Closing Your Books LLC. The Body of Accounting is an accounting consultancy firm that educates massage and bodywork business owners on how to manage, maintain and understand their business finances.