self-employed woman working from home laptop
self-employed woman working from home laptop

Retirement Plan Options for the Self-Employed 

According to figures from the US Bureau of Labor Statistics (BLS), the number of self-employed people in the US was 10.01 million in December 2023. So, how are those 10 million Americans saving for retirement? Many people who leave the corporate world in favor of self-employment also leave their company retirement benefits behind, but that doesn’t mean they should stop saving! 

Did you know that there are still lucrative options to grow your retirement savings as a self-employed individual? With proper planning, these retirement plan options for the self-employed also offer opportunities to save on your tax bill.  

Here are the most common types of self-employed retirement plans, all of which include features for small business owners and sole proprietors: 

Simplified Employee Pension (SEP) IRA 

SEP IRAs are ideal for small businesses with no or few employees. Employees of small businesses and sole proprietors can contribute to this IRA plan and are subject to the same rules regarding accruals, withdrawals, and contributions as traditional IRA plans. The biggest difference with a SEP IRA is the amount you can contribute.  

According to the Internal Revenue Service, you can contribute as much as 25% of your net earnings from self-employment. An important aspect to note here is that you must contribute an equal percentage for all employees. For example, if you contribute 5% of your profit to a SEP IRA, you must also contribute 5% of the salary of each eligible employee. If you don’t have employees, you are free to contribute on your own behalf up to the contribution limit (you can find the latest limits here). 

Traditional or Roth IRA 

Another common retirement plan option for the self-employed, a traditional or Roth IRA tends to work well for individuals looking to contribute a modest amount or roll over a 401(k) balance from a prior employer. While traditional and Roth IRAs have lower contribution limits, they also offer tax perks. Because IRAs aren’t associated with an employer, they are wonderful for self-employed individuals who are just starting out, or for those who only plan to contribute a small amount per year. 

The main difference between a traditional IRA and Roth IRA is the way taxes are handled.  

  • In a traditional IRA, you contribute pre-tax income (or deduct your contributions on your tax return) 
  • Roth IRAs are funded by post-tax income 

Eventually, you pay taxes on both types of accounts, but the taxes are deferred in a traditional IRA. If you believe that you are in a lower tax bracket now than you will be in retirement, it may be advantageous to contribute to a Roth IRA. You will be paying the taxes now and avoid a larger bill in the future when you withdraw (you also won’t pay tax on the account’s earnings). On the flip side, if you expect to be in a lower tax bracket in retirement, a traditional IRA might be best suited for you.  

Another advantage of a Roth IRA is that there is no penalty for early withdrawals since you have already paid taxes on your contributions. Traditional IRAs, however, are generally subject to a 10% early withdrawal penalty if you take the money before the age of 59 ½.  

The other main difference between the two IRAs is the income limit. You may be eligible to make partial contributions depending on your income. 

A traditional IRA can be converted to a Roth IRA—people often make this move when there is evidence it would be beneficial from a tax perspective. 

Solo 401(k) plan 

Solo 401(k) plans are a good option for sole proprietors, as well as for small business owners with no employees (other than the owner’s spouse). They are one of the most popular retirement plan options for self-employed individuals who are sole proprietors. With a Solo 401(k), you can contribute just as much as you would to a corporate plan. Many choose this option over a SEP IRA because you can make contributions as both an employer and an employee. As a result, you may end up making larger contributions to fund your retirement while also taking bigger tax deductions. If you are 50 or older, a Solo 401(k) allows for larger contributions than a SEP IRA. 

Find the latest Solo 401(k) contribution limits on the IRS website.  

Which is the best retirement plan for self-employed individuals? 

It’s not uncommon for self-employed individuals to put off saving for retirement. Don’t be one of them! Saving for retirement is one of the most important steps you can take now to ensure financial security in the future. The sooner you start taking advantage of retirement savings accounts, the better, even if you can only contribute a small amount per year. We recommend speaking with a qualified financial planner to determine which retirement plan is best suited for your situation.  

Contact us to schedule your consultation to learn more about the best self-employed retirement option for you.  

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