Evaluating Retirement Plans for Self-Employed Individuals

Evaluating Retirement Plans for Self-Employed Individuals

It can be challenging to plan for retirement when you are self-employed, but it is beneficial in a number of ways to save for retirement early and take advantage of financial tools that can save you money now while building security for your future. There are viable retirement plans for self-employed individuals and small business owners that can fit into your independent lifestyle.


Understanding Retirement Options for the Self-Employed

Employed individuals who work full-time for a large company usually have access to employee-sponsored plans where they make matching contributions to a 401k plan or similar retirement fund. In contrast, self-employed retirement planning will need to be funded entirely with your own investments. Many of these financial instruments offer tax incentives and other advantages that can allow you to save more for retirement than you thought possible.


Options to Consider for Setting up a Retirement Plan

Traditional IRA: Anyone can open an Individual Retirement Account or IRA and receive a tax deduction for funds placed in the account. The amount that is tax deductible may be limited by your household income and other self-employed retirement plans. After age 59 ½, you can take distributions from the account, which are taxed as normal income.

ROTH IRA: When you put money into a ROTH IRA, it has already been taxed and generates no tax deduction. However, when you retire and receive distributions, they will not count as taxable income at that time. There are still limits on how much you can put into a ROTH IRA each year, and the contribution limit between traditional and ROTH models is combined for the tax year.

SEP IRA: SEP stands for Simplified Employee Pension, and this type of IRA has a much higher contribution limit. Setting up these self-employed retirement plans requires some paperwork, and business owners must make contributions for all employees at a fixed percentage of their earnings. When it comes to tax time, your self-employment earnings are reduced by the contributions to the SEP IRA and half of your self-employment taxes.

SIMPLE IRA: Another small business retirement plan for employees is the SIMPLE IRA. Like SEP IRAs, these require setup and financial planning, but allow your employees to contribute directly to the plan while you as the business owner make matching contributions. You must have fewer than 100 employees to use a Savings Incentive Match Plan for Employees (SIMPLE IRA). Your matching contributions are tax deductible.1

Solo 401 (k): This option is available to you as a self-employed business owner if you have no employees other than your spouse. A Solo 401k for self-employed individuals functions like a traditional or ROTH IRA, depending on how it is set up, but allows much larger contributions annually. You will need to file paperwork in an ongoing manner with the IRS to maintain your ability to use a Solo 401 program but there are many advantages if you are working alone or with your spouse and need to put aside pre-tax or post-tax funds for your family’s future.

More Complex Retirement Plans: With sound financial planning, you can set up a more complex self-employed retirement plan involving profit sharing, defined benefits (pension plan), or money purchase plans. All of these options offer tax savings but may require a dedicated financial expert to set up and complete annual filings to maintain compliance.


Choosing the Right Self-Employed Retirement Plan for Your Business

  • Keep Your Business in Good StandingIf you have a long time to save for retirement, ROTH IRAs are excellent for tax-free growth.
  • Traditional IRAs are easy to set up but may limit your ability to use other retirement plans.
  • If your small business has employees, SIMPLE IRAs are a good option.
  • If you have few employees or only family working for your business, SEP IRAs are helpful but you must contribute the same percentage for all your employees covered by the plan.
  • If you have no employees other than your spouse, you can use Solo 401k to take advantage of a ROTH option, or SEP IRAs for less paperwork and filing requirements.


Catch Up Contributions

Each year, the IRS allows individuals over the age of 50 to make catch-up contributions to many types of retirement plans.2 Check current year limits and add additional money to your eligible accounts at the end of the year to take advantage of higher contribution limits than younger business owners.


Keep Your Business in Good Standing

To qualify for self-employed retirement funds and tools, your sole proprietorship, partnership, or LLC needs to be in good standing with the state(s) where you do business. You can complete sales permits and business registrations, file annual or biannual statements of information, and obtain a certificate of good standing in one place with FastFilings. Make sure that your business is in compliance before you put your self-employed retirement plan into action!



  1. https://www.irs.gov/retirement-plans/plan-sponsor/simple-ira-plan
  2. https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-catch-up-contributions

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