Your Guide to Retirement Accounts as a Self-Employed Person

You need to be saving for retirement. It doesn’t matter if you are self-employed or an employee; if you’re 25 or 45. You need to invest for your future self to be taken care of during retirement.

When you’re employed, most of the time you have an easy route to retirement savings: employer sponsored 401(k)s. But when you’re self-employed, it can be a little bit more difficult to find out the options. We’re going to dive into some of the common options available. Keep in mind that you may be able to save via multiple accounts depending on your situation, ex. Roth IRA and Solo 401(k). Be sure to fully think about your own situation and which would be the best route for you.

 

Types of Contributions:

These may apply to multiple kinds of retirement accounts. So, you may have a 401(k), but you can choose if you want the contributions to be made on a traditional or Roth basis. In addition to choosing a type of retirement account, you’ll need to choose how you want to make contributions.

Traditional: contributions are made on a pre-tax basis. This means you have not paid taxes on the money before it goes into your account. When you withdraw the money, you will need to pay some taxes on it. Traditional contributions could be tax deductible or lower your adjusted gross income, meaning you could lower your tax bill now.

Roth: contributions are made on an after-tax basis. This means that you have already paid taxes on the money (probably through withholding/self-employment taxes). When you withdraw the money, you won’t need to pay taxes on it again. Although your contributions probably won’t be tax deductible now, you may qualify for tax credits or may save on your tax bill over the long term.

 

Roth/Traditional IRA

Independent Retirement Accounts (IRA) are a great way to start saving for retirement. When I first started working after college, I set up a Roth IRA because my employer didn’t offer a 401(k). They are relatively straight forward and easy to set up.

You have the option to set up an IRA that is either a traditional or Roth account. With either, the maximum you can contribute each year is $5,500 (as of 2018). If you are 50 or older, you can contribute an extra $1,000 per year.

 

Simplified Employee Pension (SEP-IRA)

SEP-IRAs are IRAs that can be set up for self-employed individuals and their employees. They are fairly simple to set up (only requiring a simple one-page form) and offer a little bit of flexibility. For example, you can choose not to make contributions during certain years if you want. You can set up a SEP plan as late as the due date of your income tax return for that year (including extensions).

• Employees who meet the following requirements must be included in your SEP plan:
• At least 21 years old
• Worked for your business at least 3 out of the last 5 years

Received at least $600 in compensation last year

If you want to make these requirements looser, ex. must be 18 years old, you can.

You can contribute up to 35% of your net earnings from self-employment (not including contributions for yourself. The maximum is $55,000.

 

Solo 401(k)

Solo or Individual 401(k)s allow you to set up a qualified retirement plan for the business owner(s) and their spouse(s). Other employees are not eligible for this plan. Since the requirement only stipulates that the owner must make some self-employment income, it is very flexible. This can even be an option if your business is part time.

As of 2018, you can make annual salary deferrals up to $18,500 (plus another $6,000 is you are 50 or over). These contributions can either be pre-tax or Roth. In addition, you can contribute another 25% of your net earnings from self-employment, bringing the total to $55,000.
You can build a plan that allows you to take loans and hardship distributions from your balance as well.

 

Savings Incentive Match Plan for Employees (SIMPLE IRA)

SIMPLE IRAs are a good option if you do not currently have a retirement plan set up through your business. If you have over 100 employees this will not be an option. But since it is free from a few rules that other plans are subject to, it tends to have lower administration costs.
You can contribute all of your net earnings from self-employment up to $12,500 in 2018.

Both the employee and employer can make contributions, although the employee is not required to. The employer is required to make contributions, but has two options: matching the employee’s contributions dollar for dollar up to 3% of their compensation or 2% of every employee’s compensation that makes at least $5,000.

 

The Internal Revenue Service’s website has a ton of information about the tax implications of each plan. Do some more investigation of your preferred choice, then start building that nest egg!