How to save for retirement if you’re self-employed

Planning for retirement is complicated. All the different choices can seem like alphabet soup — whether you’re considering an IRA, 401K, or HSA. 

And, if you’re one of the nearly 30 percent of Americans that are self-employed, you don’t have guidance on investment options through your employer. In this article, we’ll help you unpack the various alternatives available for self-employed workers, as well as options for small business owners and operators. 

Here’s a snapshot of some of the most popular retirement investment options.

Traditional IRA 

A traditional IRA (individual retirement account) allows you to set aside a portion of your income for retirement on a pre-tax basis.

Who it’s for:

• Those just getting started with investing
• People saving less than $6,000 a year

How it works:

• Contribute up to $6,000 (plus an additional $1,000 if you are over 50)
• You may be able to deduct some or all of your contributions
• You pay ordinary income tax on withdrawals of your earnings and on any contributions you originally deducted on your taxes

Roth IRA

A Roth IRA allows you to set aside after-tax income up to a specified amount.  Earnings and withdrawals are tax-free after age 59 ½.

Who it’s for:

• Those just getting started with investing
• People saving less than $6,000 a year

How it works:

• Contribute up to $6,000 (plus an additional $1,000 if you are over 50)
• You can’t deduct your contribution from your taxable income
• You don’t pay taxes on withdrawals of your contributions
• You don’t pay taxes on withdrawals of your earnings as long as you take them after you’ve reached age 59½ and you’ve met the 5-year-holding-period requirement

SIMPLE (Savings Incentive Match Plan for Employees) IRA

You can invest net earnings in a SIMPLE IRA plan along with a matching contribution.

Who it’s for:

• Self-employed workers (or business owners and operators with up to 100 employees)
• Workers that don’t have additional IRA plans, such as a SEP IRA

How it works:

• Contribute up to $13,500 a year (if you’re 50 or older, you can contribute an additional $3,000) 
• Contribute up to an additional 3 percent matching contribution of your self-employment income
• Withdrawals will be included in your taxable income and may be subject to a 10 percent additional tax if you’re under age 59 1/2
• Withdrawals within two years of opening the account are subject to a 25 percent penalty

SEP (Simplified Employee Pension) IRA

Like other traditional retirement accounts, SEP IRAs let you defer taxes on contributions and any investment growth in the account. 

Who it’s for:

• Self-employed workers and small business owners and operators
• Those that want to make a higher contribution than is possible with a Roth or SIMPLE IRA

How it works:

• Contribute up to 25 percent of your net earnings per year — up to $57,000
• You can fund your IRA after you pay your taxes
• Withdrawals will be included in your taxable income and may be subject to a 10 percent additional tax if you’re under age 59 1/2

Defined benefit plan

A defined benefit plan is similar to a traditional pension plan with a stated annual benefit you will receive at retirement.

Who it’s for:

• Self-employed workers, or business owners and operators who have a high income and want to save on an ongoing basis
• Those who want a guaranteed stream of income in retirement

How it works:

• Contribution is calculated based on the benefit you’ll receive at retirement, your age, and expected returns
• You’ll work with an actuary to determine your deduction limit
• Plans are expensive with high set-up and annual fees

Solo 401K

A Solo or Individual 401(k) plan offers self-employed workers and business owners many of the same benefits of a traditional 401(k).

Who it’s for:

• A self-employed worker or a business owner with no employees (other than a spouse)

How it works:

• Contribute up to $19,500 per year (plus an extra $6,500 if you’re over 50) 
• As an employer, you can also contribute up to 25 percent of your income up to a maximum of $58,000
• Your combined employee and employer contribution can’t exceed $64,500

Health savings account

In addition to these investment options, health savings accounts (HSAs) are another vehicle for saving for retirement. HSAs allow you to set aside money for qualified medical expenses, and offer many tax advantages:

Who it’s for:

• Those with qualified high-deductible health insurance plans

How it works:

– Any interest, dividends, or capital gains you earn are nontaxable

– Withdrawals for qualified medical expenses are tax-free
– Unlike a 401(k) or IRA, you don’t have to begin withdrawing funds at a certain age

Working with a financial advisor

Because there are so many possible ways to invest, having a professional advisor in your corner can make a big difference. 

There are many types of advisors available, depending on your needs and budget. Options include traditional financial advisors, online planning services, and even robo advisors that use computer algorithms to create and manage your portfolio for a small fee.

Just like traditional employees, self-employed workers and business owners have many ways to build a nest egg for retirement. The sooner you start saving, the better positioned you’ll be when you retire. 

For more investment information, Investopedia is a great resource for financial definitions and investing essentials.

This content is for informational purposes only; you should not construe any such information as legal, tax, investment, financial, or other advice. Field Nation has no affiliate partnership with any person or business mentioned in this post.