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How to put Money Aside for Retirement When You’re Self-Employed?

How to put Money Aside for Retirement When You’re Self-Employed?

May 15, 2023

Creating a Retirement Plan Option for Business Owners: Retirement Plans for the Self-Employed Retirement Plan and How to Save for Retirement.

Self-employment offers a great deal of freedom and also comes with unique challenges. Without access to an employer-sponsored retirement plan, employer contributions, or incentive match plan for employees, self-employed individuals must take matters into their own hands and design a retirement plan that works best for them. In this guide, we’ll explore the importance of putting away money and creating a strategy as well as three popular retirement plan options for self-employed people.

The Importance of Saving for Retirement When Self-Employed.

Without an employer-sponsored retirement plan, it’s essential for self-employed (1099) business owners to take control of their financial future by creating a solid retirement strategy. This involves setting realistic savings goals and consistently contributing to retirement accounts over time. By doing so, you can enjoy the benefits of compound interest and potentially build a substantial nest egg that will provide security in your golden years.

In addition to securing your own financial future, having a solid retirement plan can also provide tax advantages that lower your overall tax burden. As a self-employed individual, there are several types of accounts available that offer tax benefits, such as SEP-IRAs and solo 401(k)s. By carefully selecting the right type of account and making consistent contributions throughout the year, you can maximize these benefits while working towards achieving your long-term financial goals.

It’s important to remember that your retirement savings plan is not something that can be put off until later in life. Starting early and being consistent with contributions is key to building a strong foundation for your financial future. By taking control of your retirement planning today, you’ll be able to enjoy peace of mind knowing that you’ve taken steps towards securing a comfortable retirement.

Retirement Plan Options for Self-Employed Retirement Plan or Independent Contractor: Solo 401(k), SEP IRA, ROTH IRA in 2023.

While there are several types of accounts available to allow you to save if you're self-employed, we will focus on three popular options: Solo 401(k), Simplified Employee Pension (SEP) IRA, and Roth IRA (including data on catch-up contributions).

Solo 401(K)

A Solo 401(k) is an excellent option for business owners who don’t have any employees besides themselves and their spouses. With higher annual contribution limits compared to traditional 401(k)s ($66,000 in 2023 or $73,500 if age 50 or older), both the business owner and their spouse can contribute towards their retirement savings. The Solo 401(k) becomes their workplace retirement plan.

To establish a Solo 401(k), you may choose from various investment options such as stocks, bonds, and mutual funds. Additionally, you can act as the trustee of your account, which gives you complete control over your investments. Solo 401(k)s offer tax-deferred growth on earnings, which means that you won’t have to pay taxes on the account’s profits until you start making withdrawals, and you must include your social security benefits.

Simplified Employee Pension (SEP) IRA

An SEP IRA is a type of retirement account designed specifically for 1099 individuals and small business owners. With this plan, contributions can be made by both the employer (the self-employed) and the employee (if applicable). (Internal Revenue Service) In 2023, the maximum annual contribution limit for an SEP IRA is 25% of compensation or $66,000 for 2023 ($61,000 for 2022; $58,000 for 2021; $57,000 for 2020 and subject to annual cost-of-living adjustments for later years), whichever is LESSER.

One of the main advantages of an SEP IRA is its flexibility. You’re not required to contribute every year or maintain a fixed contribution percentage – perfect for those with fluctuating income levels. Additionally, like Solo 401(k)s, SEP IRAs also offer tax-deferred growth on earnings.

One of the disadvantages to a SEP IRA is self-employed earnings are limited to $330,000 in 2023, $305,000 in 2022, $290,000 in 2021 and $285,000 in 2020. 

Roth IRA

A Roth IRA is ideal and another popular option for 1099 individuals who want to save for retirement. Unlike traditional IRAs and other retirement accounts mentioned above, contributions to a Roth IRA are made after-tax rather than pre-tax. This means that while you don’t get an immediate tax deduction when contributing to a Roth IRA, withdrawals in retirement are tax-free as long as certain conditions are met.

For 2023, the maximum annual contribution limit for Roth IRAs is $6,500 or $7,500 if age 50 or older. While these limits may seem significantly lower compared to Solo 401(k) and SEP IRAs, the potential for tax-free withdrawals in retirement makes Roth IRAs an attractive option for many self-employed workers.

Choosing The Right Retirement Plan

When deciding which type of retirement benefits best suits your needs as a self-employed individual, consider factors such as your income level, retirement age, tax situation, and long-term financial goals. Each account type offers unique benefits and limitations that should be weighed carefully to make an informed decision.

Don’t hesitate to seek assistance from a licensed financial advisor who can help you evaluate your options and develop a retirement strategy tailored to your specific needs. Remember, the sooner you start saving for retirement, the better off you’ll be in the long run.

In conclusion, being self-employed may present some challenges when it comes to saving for retirement. However, with careful planning and the right approach, you can create a retirement strategy that ensures financial security in your later years. By considering options like Solo 401(k), SEP IRA, and Roth IRA accounts, you can take control of your future and build a nest egg that will support you throughout your retirement.


About the Author:

Damon Paull is a Marine Corps veteran who has traveled to over 20 countries. As a financial advisor in Houston, Texas, he is passionate about helping business owners and individuals pursue their financial goals. You can connect with Damon and his team at: 703.362.5747 or DPaull@totuswm.com.