Investing in Retirement for the Self-Employed

Investing in Retirement for the Self-Employed


Saving for retirement while self-employed can be quite different than doing so as an employee. While employees generally deal with 401(k) plans – as a self-employed worker or freelancer you have options, each with different rules and benefits. The three most common are SIMPLE IRAs, SEP IRAs, and Individual (or Solo) 401(k) plans.

Savings Incentive Match Plan for Employees (or SIMPLE) IRAs allow you to make tax-deferred contributions, for the 2017 tax year, of up to $12,500 a year normally, or up to $15,500 if you are over age 50 (catch-up contributions). While these contribution limits are lower than the other options, SIMPLE IRAs have the added flexibility of being able to be used even after you take on employees, the catch being that you will need to match employee contributions, up to 3% of their compensation or make a flat 2% contribution regardless of if the employee contributes.

SEP (Simplified Employee Pension) IRAs are another popular option for freelancers – especially those who don’t plan to add employees down the road. With SEP IRAs, your contribution limit is the lesser of up to 25% of your net earnings from self-employment, with a cap of $270,000 on earnings used in the 25% calculation, or an inflation-adjusted maximum of $54,000 in 2017. SEP IRAs don’t have catch-up contributions. They can also be used when you have employees, however, they are solely funded by the employer – employees don’t contribute. While SEP IRA contributions are discretionary, as the owner, you would be required to contribute the same percentage of salary to each employee’s SEP IRA that you contributed to your own account. For this reason, they are better suited to self-employed individuals who don’t plan to take on employees.

 Solo 401(k) plans have a few other features 
that make them a compelling choice for many


A third option for self-employed retirement savings is the Individual (or Solo) 401(k) plan. This plan allows for up to $18,000 in employee salary deferrals (including an additional $6,000 if you are 50 or older) in 2017. In addition, as the employer you can contribute up to an additional 25% of your net earnings from self-employment – up to a combined total of $54,000 in 2017. Solo 401(k) plans have a few other features that make them a compelling choice for many freelancers. First, you have the option to make Roth contributions – which are contributions that don’t get you a tax deduction at the time you make them like regular contributions do, but where regular contributions are treated as ordinary income when withdrawn in retirement, Roth contributions both grow, and can be withdrawn, entirely tax free under current law. Making Roth contributions can be especially valuable if expect that you will be in a higher tax bracket in retirement than you are today which can be true for many young people. Another feature of Solo 401(k) plans is that they allow for the addition of your spouse as a second employee without forcing you to contribute to employee’s accounts in order to contribute to your own, as we’ve seen with SIMPLE and SEP IRAs.

Lastly, if you are just starting out, and larger contribution limits are not a requirement for you, you could always use a Traditional or Roth IRA to put away at least some money for your retirement. Contribution limits for 2017 are $5,500 (plus an additional $1,000 catch-up contribution if you are 50 or older). Be aware that the Roth IRA has income limits to be allowed to make a contribution, currently $133,000 (and phasing out between $118,000 and $130,000) if single, or, if married and filing jointly, the phaseout starts at $186,000 and contributions are fully barred once you reach $196,000 in Modified Adjusted Gross Income (MAGI).


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