5 Self-Employment Retirement Options

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people are becoming self-employed these days. While being self-employed has many benefits such as having more flexibility or freedom to choose your own schedules, working as much or as little as you want, etc., there are downsides to being self-employed as well.

Self-employed people have to pay extra taxes unlike traditional employees do. Self-employment does not come with a regular paycheck and retirement plans like a 401(k). The good news is there are retirement plan options for millions of self-employed workers in the U.S. to reduce their taxable income while putting money away for retirement and you do not want to put off retirement.

This post will focus on 5 different self-employment retirement plan options.

1. Traditional IRA

A traditional IRA (Individual Retirement Account) is a retirement plan for individuals only. You make tax-free contributions to your traditional IRA. Your contributions to a traditional IRA are never taxed until you take a distribution. You will pay taxes on withdrawals in retirement.

A traditional IRA is a good option for self-employed people, e.g. freelancers or entrepreneurs to save for retirement and avoid paying extra taxes. You can contribute up to $5,000 each year in a traditional IRA to reduce your taxable income. A traditional IRA allows you to choose from a wide variety of great investment options such as individual stocks, mutual funds, ETFs, bonds, options and currency.

2. Roth IRA

A Roth IRA is the best option for those freelancers or self-employed workers in general who want to pay taxes today rather than in retirement. With a Roth IRA, you pay taxes now, meaning your contributions grow completely tax-free. Because you pay taxes today, your withdrawals during retirement are completely tax-free. So, all the money in your Roth IRA account is post-tax dollars.

You can withdraw contributions to a Roth IRA before retirement age 59 1/2 without tax penalties, but if you withdraw earnings accumulated in the account before age 59 1/2, you will incur 10% early withdrawal penalty.

Like a traditional IRA, you can invest in a wide variety of investment options such as individual stocks, mutual funds, bonds, ETFs, options and currency. You can contribute up to $5,500, or $6,500 per year if you are 60 or older. You may not qualify to contribute to a Roth IRA if you have a high salary.


If you are a sole proprietor, small business owner, or you own a partnership, S-Corporation, C-corporation or LLC, and have employees, a Simplified Employee Pension (SEP) IRA is a better option than traditional and Roth IRA. This option is for both small business owners with employees or those who are self-employed with no employees.

As a self-employed business owner, you can contribute up to 20% to 25% of your pre-tax income or $53,000, whichever is lower to a SEP IRA. If you are a business owner or an employer, contributions can never come from your employees. Contributions can only come from an employer. That said, matching contributions are optional. You choose the amount you want to contribute each year.

However, if you want to contribute, you must give each ’employer’ the same percentage. If you are running a home-based business or freelance virtual business with employees and you contribute 20% of your income or pay to your own SEP IRA, you will also have to pay 20% of each of your employees’ pay to their SEP IRA accounts. All contributions are tax-deferred, but you and your employees will pay taxes on withdrawals in retirement. You can start taking money at age 59½.

4. Solo 401(k)

A Solo 401(k) account is also known as an Individual 401(k), and a Self-Employed 401(k). This self-employment retirement option has higher contribution limits than all other types of self-employment retirement plan options. Because this option allows you to contribute both as an employer and an employee, it has high contribution limits. But remember that you can only have your spouse as an employee.

An Solo 401(k) plan allows you to contribute up to $54,000 in 2017, both as an employee and an employer. You can also make catch-up contributions if you are older than 50. As an employee, you can contribute up to $18,000 per year.

As an employer, you can contribute up to 20% of your business’s total earnings until you reach a combined income of $54,000. You can choose to open a traditional Solo 401(k) plan or a Roth Solo 401(k) plan. If you have high self-employment income, this plan is the best option for you.

Simple IRA

A Simple IRA is a pre-tax self-employment plan option for self-employed businesses with fewer than 100 employees. Employees can contribute up to $12,500 each year, but those who are 50 years of age or older can contribute up to $15,500 each year.

As an employer, you must match what the employees contribute to their accounts up to 3% each year per employee even if you do not earn a profit for the year. This option is good for self-employed business owners with employees because it is easy to administer this plan than regular 401(k) plans.

Final Word

If you are self-employed and do not have much extra money to put away for retirement, investing in a traditional or Roth IRA is a good retirement plan option. If you are a self-employed business owner with employees, a SEP IRA or Solo 401(k) is a better option than a traditional or Roth IRA.

Which option would you choose

Posted in: Retirement

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