5 Ways to Save for Retirement When You'e Self Employed

5 Ways to Save for Retirement When You'e Self Employed
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According to the Bureau of Labor Statistics, 15 million Americans were self-employed in 2015. That’s 15 million souls who have bet on themselves instead of an employer, often in the face of incredible odds.

Despite the downsides, many self-employed workers choose this route due to the freedom and autonomy it buys, and of course the potential to make unlimited income. Unfortunately, that’s also a lot of people forging a future without many meaningful benefits. The self-employed not only have to buy their own healthcare, but they are charged with saving for their own retirements, too.

The good news for self-employed individuals is that there are a ton of ways to save for retirement on your own, many of which have their own unique advantages. Here are some of the best ways for nearly any solopreneur, business owner, or freelancer to save for the future:


SEP IRAs (Simplified Employee Pension) are commonly seen as one of the best retirement tools for the self-employed. As of 2017, workers can use this account to contribute up to 25 percent of an employee’s compensation or $54,000, whichever is less.

“This type of retirement account is simple in nature to establish, and provides plenty of flexibility in terms of investment options,” says California financial advisor and founder of Blackmont Advisors, Anthony M. Montenegro.

Contributing to a SEP IRA will decrease your tax burden tremendously, and your money will grow tax-free until retirement. If you’re interested in opening this type of account, you can do so at virtually any bank, mutual fund company, or brokerage firm. Some firms even make it easy to open an account online.

#2: Tax-deferred Annuities

Tax-deferred annuities can be a great way for self-employed entrepreneurs to tap into the advantages of tax-deferred compound interest, says Colorado financial advisor Matthew Jackson of Solid Wealth Advisors.

“If the entrepreneur has funded traditional tax-qualified retirement accounts to the annual maximum and still has additional money to invest for retirement, tax-deferred annuities allow the entrepreneur to deposit additional money into the plan and enjoy tax-deferred growth much like the traditional tax-qualified retirement vehicles offered and used by entrepreneurs,” he says.

While finding the best annuity that’s also tax-deferred can be a smart use of your time, there is one huge caveat. “The biggest difference for these contributions is they cannot be used to decrease the tax-burden for the year they were made,” says Jackson. In other words, your contributions aren’t tax-deductible.

#3: Solo 401(k)

If you are looking to maximize your yearly contributions, have the ability to borrow from your plan if your business has a lean year, and want the option to make both pre- and post-tax contributions, a Solo 401(k) plan may be your best option, notes Massachusetts financial advisor Eric Jansen of AspenCross Wealth Management.

This plan can be a smart option for high earners especially, mostly because it offers some of the highest contribution limits.

In 2017, those who contribute to a Solo 401(k) can make an annual salary deferral up to $18,000. If you’re ages 50 and older, you can boost that amount by $6,000. In addition to those amounts, you can contribute up to 25 percent of your net earnings from self-employment up to a total contribution of $54,000 for the year.

The biggest downside with this type of plan is that you can’t use it if you have employees other than your spouse. Further, you’ll have to fill out quite a bit of paperwork to open a Solo 401(k), more so than if you had chosen a SEP IRA instead.

#4: Traditional or Roth IRA

While a traditional or Roth IRA shouldn’t be your main retirement account for retirement, these are great supplementary options that can allow you to save more than you would otherwise. The key is, deciding which type of IRA is best based on your tax situation and income.

That’s because traditional IRAs and Roth IRAs work rather differently. When you contribute to a traditional IRA, for example, your contributions are tax-deductible provided you meet certain income requirements. Your money then grows on a tax-deferred basis where it can keep growing until you’re ready to start taking distributions in retirement. Then, you’ll pay income tax on those distributions.

Roth IRAs work in an opposite fashion since all contributions are made in after-tax dollars. Like a traditional IRA, however, your money grows on a tax-deferred basis. But, there’s a catch. Since your Roth contributions were made with after-tax dollars, you don’t have to pay income taxes on distributions in retirement. For most people, that’s a huge benefit that can’t be ignored.

Unfortunately, you can’t contribute to a Roth IRA if you earn too much money; in 2017, the income where you can contribute starts phasing out at $186,000 if married filing jointly and phases out completely at $196,000.

Either way, you can only contribute up to $5,500 across both traditional and IRAs each year. The only exception is if you’re ages 50 and older; in that case, you could invest an extra $1,000 in what is known as a “catch-up contribution.”


One of the last options many self-employed consider is the SIMPLE IRA, or Savings Incentive Match Plan for Employees. This type of plan was traditionally conceptualized for small business owners with employees, but it also works for solopreneurs and the self-employed. Like the SEP IRA and some others, the money you contribute is tax-deductible and grows tax-free until you start taking distributions.

The benefit here is just how simple the SIMPLE IRA is to set up. In most cases, you’ll fill out a few forms, select your investment options, and you’re done. This type of plan is also more affordable than some others to manage, mostly because it has lower administrative costs since it’s not subject to ERISA and related regulations.

The downside of a SIMPLE IRA is that contribution limits are fairly low. As of 2017, self-employed workers can only contribute up to $12,000, says Indiana financial planner Tom Diem of Diem Wealth Management.

One exception could make all the difference for older workers, however. “Employees over age 50 are allowed an additional $3,000.00 catch-up contribution,” he says,

This post was originally published on usnews.com

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