When you work for yourself, among one of the financial responsibilities you’ll be saddled with is finding ways to save for retirement. If you’re someone who is leaving a 9-to-5, you can say goodbye to 401(k) plans and matching funds.
The good news? There is no shortage of retirement options for self-employed folks. As a full-time freelancer, I’ve learned to navigate my way around the different types of plans.
And with some plans, you can actually save more than with, say, a 401(k). Here’s how the self-employed set can go about saving for retirement:
What Does It Mean To Be Self-Employed
Before we get into retirement options, the IRS has a specific way of determining whether you’re self-employed. Essentially if you’re a sole proprietor, are in business for yourself at least part-time, or a partner in a business, you can call yourself self-employed. You’ll need to pay self-employed taxes as well as quarterly estimated taxes.
Now, let’s get to the fun stuff – your retirement plan options:
Self-Employed Retirement Plan Options
I’m a big fan of IRAs for those who are just getting their feet wet with saving for retirement. They’re easy to set up, and you don’t have to be self-employed to open one. So if you’re freelancing part-time and are considering taking the leap to freelancing full-time down the line, you can start saving in an IRA now.
There are two types of IRAs: Traditional and Roth. If you save in a Traditional IRA, you can get a tax break for the year you make contributions. Roth IRAs, on the other hand, don’t come with any immediate tax benefits. However, withdrawals during retirement are tax-free.
The IRA contribution limits for 2019 is $6,000 for both Traditional and Roth IRAs. If you’re age 50 and up, there’s a catch-up contribution of $1,000 for a max of $7,000 a year.
I opened a Solo 401(k) a few years ago, and although there was a bit more paperwork involved, I’m quite happy with the contribution limits. You can have your business set up as a sole proprietorship, LLC or S-Corp when opening a Solo 401(k).
What’s neat about Solo 401(k) plans is that you can make contributions as both an employee and employer. In 2019, you can save up to 100% of your income, and up $19,000 a year if you’re under 50. If you’re over 50, you can contribute up to $25,000 for 2019.
As for the employer side, you can save 25% of your compensation. If you’re self-employed, there’s a special formula to figure out how much you can contribute as the employer. (More info can be found on the IRS site.)
The caveat with Solo 401(k)s is that to qualify to open an account, you can only have one employee. If you’re married, you and your spouse can count as a single employee.
SEP IRAs are designed for those who have employees. However, you can open an account even if you are your only employee. The contribution limits are pretty straightforward: You can sock away $56,000 a year, or 25% of an employee’s pay, whichever is the lesser of the two. With SEP IRAs, employees can’t make contributions for themselves; only employers can add funds for both themselves and for their workers.
I’ve opened a SEP IRA and Solo 401(k) and setting up a SEP IRA was easier. You can be a business of any size, and unlike a Solo 401(k), there’s no filing requirement. If you have more than one employee, you have to contribute equally to each of your employees. The thing with SEP IRAs is that there aren’t any catch-up contributions.
Short for Savings Incentive Match Plan for Employees Individual Retirement Account, SIMPLE IRAs for designed for small-business owners and sole proprietors. Like a SEP IRA, employers and employees can both have accounts. However, unlike a SEP IRA, employers and employees can make contributions into an account. If you make at least $5,000 a year, you can participate in the plan.
The kicker with SIMPLE IRAs is that unlike other retirement plans for the self-employed, you can’t opt out of participating. So if you are a small-business owner and have employees, even if your employees don’t make contributions, you will make contributions into their accounts. In 2019, the contribution limits for SIMPLE IRAs are $13,000 for individuals under 50, and $16,000 for those 50 and older.
While not technically a retirement plan, a Health Savings Account (HSA) can be used as a way to save for your golden years. HSAs are designed to offer tax savings on health-related expenses. However, many HSA accounts have an option for you to invest that money through a stock brokerage. Over time, those funds can grow and you can tap into them for your retirement. In 2019, the max contribution for HSAs was $3,500 for individuals, and $7,500 for families.
Because we self-employed folks can run into cash flow issues and variable income, it can be a lot harder for us to save for retirement on the regular. That being said, it’s not impossible.
Auto-save. If you can comfortably afford to fold in contributing to your retirement plans as part of your budget, it’ll make it that much easier to stay on track. Right now, I contribute to my HSA and traditional IRA consistently.
Save in chunks. If having income that fluctuates from month to month makes it hard to commit to saving for retirement on the regular, consider saving a percentage of your income into a fund for your retirement. Then, every few months, when you feel that it’s “safe” to move your money into a retirement account, do so. Try to make contributions every quarter, 6 months, or year.
“Layer” your savings. If you’re just starting out, you might want to open an IRA and save your money there. Then, you might want to open a Solo 401(k) or SEP IRA. You can think of it as “layering” or “stacking” different retirement accounts.
Many self-employed folks I know who are hardcore about saving for their retirement have an HSA, IRA, or a Solo 401(k), SEP IRA, or SIMPLE IRA. If you’re not sure which accounts you should open and how much to save in each, you might want to talk to a retirement specialist or financial planner. It really depends on your situation, needs and what you can reasonably afford.
While saving for retirement when you’re self-employed can be challenging, it’s definitely doable. The beauty of it is that there are plenty of options. Doing your homework will help you come up with a game plan that works for you.
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