How to Save for Retirement When You’re Self-Employed

By Emilie BurkeFebruary 22nd, 2018Budgeting and Saving Money

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The following is presented for informational purposes only. Please consult with a qualified financial planner for assistance specific to your situation.

Being self-employed comes with some perks. You can set your own schedule, decide what your time is worth, and set your own pay rate. Plus, chances are good you’ll really like your boss. But there are challenges, too. Like figuring out how to save for retirement when you don’t work for a company that offers a pension plan or 401(k).

But that doesn’t mean you don’t have options for retirement savings. Here are some of the best ways to save for retirement as an entrepreneur:

1. Solo 401(k)

If you’re a high earner, a Solo 401(k) might be a good option for you. You can contribute 25% of your earnings or up to $54,000 per year. You can make an annual salary deferral of up to $18,000. There is a big downside to this though. If you have employees other than your spouse, you can’t use this plan. Plus, there is significantly more paperwork involved than other retirement plan options.

2. SEP IRA

Contributing to a SEP IRA will not only decrease your tax burden, it will also allow your deposits to be tax-deferred until you retire. You are allowed to contribute up to 25% of your compensation or $54,000, whichever is less. With lots of flexibility with your investment options, a SEP IRA is a good choice. You can open one at most banks, mutual fund companies or brokerage firms.

3. Traditional/Roth IRA

A traditional or Roth IRA are great supplemental options, but shouldn’t be considered as your main retirement account because the contribution limits are much lower. Traditional and Roth IRAs are taxed differently so you need to choose the option that’s best for you. Your contributions to a traditional IRA are tax-deductible as long as you meet the income requirements. Your money grows on a tax-deferred basis until retirement, at which point you will need to pay income taxes on your distributions.

With Roth IRAs, it works in the opposite manner; contributions are made with after-tax dollars. Your money grows without being taxed and, since you paid taxes before depositing, you don’t pay income taxes on retirement distributions. However, if you make more than $185,000 you can’t use this type of retirement savings account.

For both types of accounts your contribution limits are low. You can only contribute up to $5,500 per year. If your 50 or older you can invest an extra $1,000 per year.

4. Tax-deferred Annuities

With tax-deferred annuities you can delay your taxes on compound interest. Tax-deferred annuities are a good supplemental option to consider if you have other retirement savings accounts and have maxed out your annual contributions. You can contribute additional funds to the plan for tax-deferred growth.

Be prepared to do your homework though. Finding an annuity that’s tax-deferred and has low fees will take some effort. There is a downside too; your contributions aren’t tax-deductible so you can’t use them to decrease your tax burden. You are also unable to touch this money for emergencies and you can’t leave it to your heirs.

There are plenty of options available to save for retirement when you’re self-employed, it just may take a little time and effort to find the one that works best for you.

If you’re concerned about your ability to build an adequate savings fund before retirement, you may benefit from speaking with a credit counselor to discuss your savings plan. Counseling is free and can help you understand the steps you need to take to reach your goals – including a comfortable, debt-free retirement.