Retirement Plans for Self-Employed People

For anyone who is self-employed, retirement planning can feel intimidating because there is no company retirement plan to join (you are the plan)!

And because there’s no plan set-up already, what I see most often, is paralysis – people doing nothing. Don’t be those people! 🙂 Get started saving for retirement if you’re self-employed.

Regardless of whether you’re a speaker, a solo practitioner, or full-time blogger (or something else entirely) – the retirement options for self-employed people are all the same. Which will work for you depends on your specific situation, so make sure you talk to a pro before you get going.

  • Related: How to Save for Retirement Early

Below is a list of four retirement planning options for self-employed people to give you some background information.

1. Individual 401k plan (i401k or Solo 401k)

The first retirement plan to consider if you’re self-employed is an individual 401k (also known as an i401k or Solo 401k). Quite often, this plan is most suitable if you want to maximize contributions. This is because not only can you contribute the specific 401k dollar amount of $18,000 ($24,000 if you’re over 50), but you can also contribute a percentage of your net profit (as the employer’s profit-sharing component). As the employer, you can contribute up to an additional 25% of your net earnings from self-employment, up to a max contribution limit (including the salary deferral) of $54,000 (2017; $53,000 2016). If your income is lower, you may be able to contribute after-tax earnings to an individual Roth 401k, which means your contributions grow tax-free.

Pros:

  • High contribution limits.
  • Tax deferred growth (or tax-free growth in a Roth).
  • A Solo 401k is relatively flexible (can allow for loans and hardship distributions).

Cons:

  • More difficult to create (paperwork may be lengthy).
  • You can’t contribute to a solo 401(k) if you have employees (other than your spouse). If you do have employees, you must open accounts and make similar contributions for them.
  • Must be established before year-end in order to make deductible contributions for the year.

2. Simplified Employee Pension plan (SEP IRA)

A SEP is a second retirement plan to consider if you’re self-employed. With a SEP, you, as the employer, establish a SEP IRA for yourself and for each of your employees. You can contribute the lesser of 25% of your net earnings from self-employment or $54,000 (for 2017; $53,000 for 2015 and 2016). You must contribute the same percentage to each employee, and employees are not allowed to contribute themselves. Setting up a SEP is relatively straightforward and does not involve additional costs or paperwork.

Pros:

  • High contribution limits (can tie contributions to profits).
  • Allows for tax deferred growth.
  • A SEP is relatively flexible.
  • Easy to create and maintain (easier than Solo 401k).
  • Can establish if you have employees (unlike a Solo 401k).
  • Can wait as late as the following year when you file your taxes to establish.

Cons:

  • Only you, as the employer, may contribute (employees cannot contribute, so employer must contribute on their behalf in an equal percentage of pay to that of the employer).
  • If you make contributions for yourself, you must make contributions for your employees, too.

3. Savings Incentive Match Plan for Employees (SIMPLE IRA)

A third retirement plan for self-employed people is a SIMPLE IRA. You, as the employer, can contribute up to $12,500 (in 2015 – 2017) of net earnings, plus an additional $3,000 if you’re 50+ (in 2015 – 2017), plus either a 2% fixed contribution or a 3% matching contribution. With this plan (unlike a SEP or Solo 401k), employees con make their own contributions. A SIMPLE IRA is permissible only for employers with 100 or fewer employees.

Pros:

  • Permissible for employers who have up to 100 employees.
  • Employees may contribute to the plan (unlike in a Solo 401k or SEP).
  • Allows for tax deferred growth.
  • Easy to create and maintain.
  • Can wait as late as the following year when you file your taxes to establish (like a SEP).

Cons:

  • Cannot use if you have more than 100 employees.
  • Employers are required to make certain contributions to match employee contributions (3% of employee comp or 2% fixed for every employee)
  • Not flexible.
  • Contribution limits are lower than a solo 401k or SEP IRA.
  • Contributions count against the max contribution limits ($18,000) you can make into a 401k (so, if this is a side business, and you’re contributing to a 401k already, this may not be the best option).

4. Traditional IRA or Roth IRA

Finally, you have the option of opening a personal Traditional IRA account or Roth IRA account. This means you’ll open a retirement investment account that anyone can open, instead of setting up a formal retirement plan for your business. With an IRA or Roth IRA, you can contribute $5,500 ($6,500 if aged 50+) annually. You can only use a Roth IRA if your income is below certain limits, annually ($118,000 for single filers and 186,000 for joint filers in 2017). Your money will grow tax-deferred in a traditional IRA and tax-free in a Roth IRA. If you have employees, you can allow your employees to set up IRAs and contribute through payroll deductions (or you can contribute on their behalf.

Pros:

  • Simple to set up and administer.
  • Low-cost.
  • Can wait as late as the following year when you file your taxes to establish.
  • Allows for tax deferred growth or tax-free growth.

Cons:

  • Low contribution limits.

A Final Note!

That about does it for self-employed options for retirement.

The biggest mistake I see self-employed people make with their retirement planning is that it’s non-existent – they aren’t actually saving for retirement.

Don’t be those people.

Consider one of the retirement plans I’ve listed above. Again, they are:

  1. Individual 401k
  2. SEP IRA
  3. SIMPLE IRA
  4. Traditional IRA or Roth IRA

I should note that there are additional retirement plans that I didn’t list, known as defined benefit plans. These are very different than the defined contribution plans above. For self-employed people, you can learn more about defined contribution and defined benefit plans on the IRS website.

Whatever you do, pay attention to your retirement savings now.