Saving For Retirement When You're Self Employed

Saving For Retirement When You’re Self Employed

by Aug 23, 2018

Being self-employed comes with a lot of trade-offs. On the plus side, choosing your own hours, working from home, and not having a boss to deal with can be very empowering. On the other hand, things like healthcare, paid time off, and employer-sponsored retirement plans are really nice benefits that self-employed people often go without.

The good news is that being self-employed no longer means having to sacrifice a retirement plan. There are a handful of great options available and choosing one (or more) means you’ll have a clear path to retirement no matter how or where you choose to work.

The following self-employed retirement savings accounts are all worth considering:

  • Traditional IRA
  • Roth IRA
  • Solo 401(k)

Each of these plans has its own unique advantages, and some are best used in combination with others.

Traditional IRA

A traditional IRA works a lot like the 401(k) plans offered by many employers, except that you open this account yourself. A traditional IRA holds all the cash and investments you’ve purchased with your own contributions.

The amount of the contributions you make are–generally–tax deductible. While your investments will grow tax-free during while you’re working, you will have to pay regular income taxes on the money your withdraw after you retire.

An important requirement to understand about a traditional IRA is that the IRS requires you to start withdrawing money from your account when you retire, or reach 70.5 years of age–whichever happens later.

Roth IRA

A Roth IRA works in basically the exact opposite way as a traditional IRA does. While it still holds all the cash and investments you make with your contributions, a Roth IRA requires you to pay taxes upfront before you make your contributions.

This means that, when you do retire, you won’t pay an income taxes on the money you withdraw. The other benefit of a Roth IRA as a self-employed retirement plan is that there is no age requirement on when you have to begin withdrawing money.
If you’re unsure whether a traditional or Roth IRA is the better choice for you retirement planning, consult with a financial planner before making a final decision.

Solo 401(k)

As a business owner, you can actually open your own 401(k) plan in which you are both the employer and the employee. This has the benefit of allowing you to make both employer and employee contributions to the plan.

There’s also something called a Roth 401(k), which are helpful for self-employed people whose income exceeds the limits for a a Roth IRA. With both the solo and Roth 401(k) plans, there’s no income limitations for participants.

Additionally, you can contribute far more to a Roth 401(k) plan than you can to a Roth IRA. The combined amount you can deposit into a traditional 401(k) and Roth 401(k) for 2018 is $18,500.


The Simplified Employee Pension (SEP) and Savings Incentive Match Plan for Employees (SIMPLE) are both valid choices for self-employed retirement plans. While the two plans have a number of differences, the majority of them become irrelevant if the plan covers just one employee. The biggest difference ends up being annual contribution limits.

In 2018, a SEP IRA allows you to contribute $55,000 or up to roughly 20 percent of your business profits–whichever is less. A SIMPLE IRA, meanwhile, permits you to make both an employee contribution of up to $12,500 (or $15,500 if you’re over 50) and an employer contribution whose size is a percent of your business profit.

Choosing The Right Plan For Yourself

Looking at all the options and details of various self-employed retirement plans can make anyone feel a bit overwhelmed. The good news is that there are plans available that allow people who are self-employed to invest and save for retirement.

To find the right plan for you, consider working with an experienced financial planner who can evaluate your situation, discuss your goals, and make a recommendation that will work for you.

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