Shifting from working for an employer to self-employment can be tough financially, because the burden of setting up a lot of the “financial tools” for your future shift to you. When you work a job, your employer takes care of your insurance (or at least offers you options), and your retirement is typically through company-sponsored 401(k)s or maybe even a pension.
Now, once you become self-employed, you have to do it yourself. Setting up these accounts was one of the biggest issues I hear from readers all the time.
The nice thing is, there are a lot of options when it comes to self-employed retirement plans. No matter your situation, there is probably an option that will work well for you.
The main self-employed retirement plans are:
- SEP-IRA
- Solo 401(k)
- SIMPLE IRA
SEP-IRA
The SEP-IRA is the go-to retirement savings account for one-man businesses. If you’re a self-employed entrepreneur, this can be a good choice for you.
You can contribute up to as much as 25% of your net income, up to a maximum of $66,000 (in 2023). See the SEP IRA Contribution Limits here.
The great thing about this is that, like any other IRA, you have until April 15 to fund your account. That means you can file your taxes and make a larger contribution to trim your tax bill.
Another huge plus is that contributing to a SEP-IRA won’t interfere with your contributions to a 401(k) plan. That means if you’re starting your business on the side while working full-time, you can still take advantage of your employer’s plan while building your own business.
The only drawback to the SEP-IRA is if you ever hire employees. The IRS views the money you put into the SEP-IRA as an employer contribution, so if you hire workers, you have to contribute the same amount to their SEP-IRAs too. However, for the solopreneur, this doesn’t really matter.
Solo 401(k)
The Solo 401(k) can be a good choice for business owners who have significant earnings they want to save.
With a Solo 401(k), as an employee, you can save $22,500. Then, as the employer, you can contribute another 25% of compensation, up to a maximum of $66,000. Then there’s the catch-up contribution if you’re 50 or older, which is another $7,500. That means you can save a total of $66,000 or $73,500 in a Solo 401(k) per year.
Check out the full 401k Contribution Limits here.
Because of the high contribution limits, this plan is best for entrepreneurs who make a lot and are able to save it.
There will typically be fees associated with setup and annual maintenance, but they’ll be low for a small business or self-employed business.
Also, just like a regular 401(k), you can always borrow from your Solo 401(k), although it’s not recommended.
The biggest drawbacks of the Solo 401(k) are that only the self-employed business owner and a spouse can participate, and if you have a 401(k) at your nine-to-five job, you may already be contributing the max. The IRS limits apply to all 401(k) contributions, so if you’re depositing $22,500 at work, you can’t deposit any more being self-employed.
Check out our list of the best solo 401k providers. Or check out RocketDollar if you're looking for a Self-Directed Solo 401k.
SIMPLE IRA
Finally, the third option is the SIMPLE IRA. This is also known as the Savings Incentive Match Plan for Employees.
This is the ideal plan for businesses that have employees and want to offer them a plan as a perk (that you can also possibly take advantage of).This is designed for small businesses, with a mandatory limit of less than 100, but ideally less than 10.
You can make contributions of up to $15,500 pretax, or $19,000 if you’re 50 or older. There aren’t any income restrictions, and your contributions are tax-deductible.
Inside the account, your investments grow tax-deferred, just like any other IRA.
As the employer, you’re generally required to match the employee contribution up to 3% of the employee’s salary, dollar for dollar. This can make it burdensome for small firms.
You should also note that this plan isn’t for side jobs. You can’t contribute to the plan if you’ve already maxed out employee contributions to a 401(k) at your day job.
Remember, when it comes to these types of accounts, you should consult both a tax advisor or accountant and a financial planner. These accounts come with serious taximplicationsif not set up correctly (and huge benefits if set up correctly), and they may also require different types of paperwork.
You can open any of these accounts at a discount brokerage, including my favorite discount brokerages. Plus, Charles Schwab and others will offer you assistance in setting up your accounts for free.
Which do you think is the best self-employed retirement plan? Do you have experience with any of these?
FAQs
SEP IRA. Best for: Self-employed people or small-business owners with no or few employees. Contribution limit: The lesser of $69,000 in 2024, or up to 25% of compensation or net self-employment earnings, with a $345,000 limit on compensation that can be used to factor the contribution.
What is the best retirement plan for a self-employed person? ›
SEP IRA. Best for: Self-employed people or small-business owners with no or few employees. Contribution limit: The lesser of $69,000 in 2024, or up to 25% of compensation or net self-employment earnings, with a $345,000 limit on compensation that can be used to factor the contribution.
What are the two 2 most popular personal retirement plans? ›
Best Types of Retirement Plans in 2024
Traditional IRAs: a tax-advantaged savings account that lets your funds grow tax-deferred. Roth IRAs: a tax-advantaged savings account of after-tax funds (money that you've already paid taxes on)
What is the absolute best retirement plan? ›
A 401(k) plan is one of the best ways to save for retirement, and if you can get bonus “match” money from your employer, you can save even more quickly. A 401(k) plan is one of the best ways to save for retirement, and if you can get bonus “match” money from your employer, you can save even more quickly.
How to put money away for retirement self-employed? ›
open a SIMPLE IRA through a bank or another financial institution. Set up a SIMPLE IRA plan at any time January 1 through October 1. If you became self-employed after October 1, you can set up a SIMPLE IRA plan for the year as soon as administratively feasible after your business starts.
What are two retirement plans for self-employed individuals? ›
Understand plan options: Research various retirement plans available for self-employed individuals, such as SEP IRAs, Solo 401(k)s, SIMPLE IRAs, or a traditional IRA. Compare each plan's contribution limits, tax advantages, and administrative requirements to determine which best suits your needs.
Is a 401k or IRA better for self-employed? ›
Both SEP IRAs and solo 401(k) accounts are retirement savings vehicles you can use if you're self-employed. The SEP IRA is generally simpler and less expensive to set up, but the solo 401(k) may offer more flexibility and allow bigger contributions.
What is the $1000 a month rule for retirement? ›
The $1,000-a-month retirement rule says that you should save $240,000 for every $1,000 of monthly income you'll need in retirement. So, if you anticipate a $4,000 monthly budget when you retire, you should save $960,000 ($240,000 * 4).
Where is the safest place to put your retirement money? ›
The safest place to put your retirement funds is in low-risk investments and savings options with guaranteed growth. Low-risk investments and savings options include fixed annuities, savings accounts, CDs, treasury securities, and money market accounts. Of these, fixed annuities usually provide the best interest rates.
Is a Roth IRA better than a 401k? ›
A Roth IRA might be the better choice if you:
Want access to a wider range of investment options. Want to be able to withdraw contributions tax- and penalty-free before you turn 59½ without making a plan loan.
The post on Ramsey Solutions recommends going back to your traditional 401(k), 403(b) or TSP workplace retirement plan. Keep bumping your contribution up until you hit 15%. While you're there, make sure you have your account set up for automatic withdrawals.
How to retire at 60 with no money? ›
If you retire with no money, you'll have to consider ways to create income to pay your living expenses. That might include applying for Social Security retirement benefits, getting a reverse mortgage if you own a home, or starting a side hustle or part-time job to generate a steady paycheck.
How to retire at 55 with no money? ›
If you determine you need more than Social Security income to meet your retirement needs, consider these options:
- Set a detailed budget to minimize expenses. ...
- Downsize your home. ...
- Continue working. ...
- Take advantage of tax-advantaged retirement plans. ...
- Open a traditional or Roth IRA.
You report your earnings for Social Security when you file your federal income tax return. If your net earnings are $400 or more in a year, you must report your earnings on Schedule SE, in addition to the other tax forms you must file.
Can you have a retirement plan if you are self-employed? ›
More In Retirement Plans
If you are self-employed (a sole proprietor or a working partner in a partnership or limited liability company), you must use a special rule to calculate retirement plan contributions for yourself. Retirement plan contributions are often calculated based on participant compensation.
How do I avoid taxes on retirement payout? ›
5 Ways to Reduce Tax Liability in Retirement
- Remember to Withdraw Your Money From Your Retirement Accounts. ...
- Understand Your Tax Bracket. ...
- Make Withdrawals Before You Need To. ...
- Invest in Tax-Free Bonds. ...
- Invest for the Long-Term, Not the Short-term. ...
- Move to a Tax-Friendly State.
The qualifications for Social Security are the same, whether you're self-employed or work for someone else. Self-employed individuals earn Social Security work credits the same way employees do and qualify for benefits based on their work credits and earnings.
Is SEP IRA better than Roth IRA? ›
SEP IRAs have higher contribution limits that allow you to save more, and you may benefit from an immediate tax deduction. Roth IRAs grow tax-free, and you don't have to worry about RMDs. Here are some scenarios to help you decide: A SEP IRA may be a better choice if you have a high income.
Is 401k good for self-employed? ›
Self-employed 401(k) contributions may also make you eligible for added tax breaks. If your business is not incorporated, you can generally deduct contributions for yourself from your personal income. If your business is incorporated, you can count the contributions as a business expense.
