Being self-employed lets you do what you love on your own terms. But, it does add some complexity, including on how to save for retirement. Let’s go over some retirement plans for the self-employed.
Retirement Plans for Self-Employed
With a W2 job, your employer usually provides a retirement option for you. You can just put a portion of each paycheck into it and not worry. As the boss of yourself, you’re responsible for deciding how to save for retirement.
Why should you save for retirement? The magic of compounding interest means the dollars you put away today will grow substantially when you’re ready to retire. There are also tax advantages to many retirement accounts.
There are several types of retirement accounts for self-employed people.
1. Individual 401(k)
If you’ve ever worked for a traditional employer, you probably had an option to sign up for a 401(k) plan. The individual 401(k) plan is very similar. Sometimes, this is also called a solo 401(k) or a solo k.
The individual 401(k) comes with the traditional version and the Roth version. The traditional lets you contribute money on a pre-tax basis and it grows tax-deferred. Your money is taxes when you withdraw it down the road.
You contribute post-tax dollars to your Roth account and there’s no taxation upon withdrawal.
As a self-employed worker, you can contribute a large amount to a solo 401(k). You can contribute to your plan as an employer and as an employee. Like W2 employees, you can contribute $19,000 a year (in 2019) of your earned income. As an employer, you can contribute up to 25 percent of your compensation.
Your contributions can’t exceed $56,000 for 2019 but that’s still a lot more than W2 employees can sock away.
2. Simple IRAs
A Simple IRA is a common retirement vehicle for small business owners and self-employed workers. Your contributions are tax-deductible and your savings grow tax-deferred. You will pay taxes when you withdraw from your Simple IRA.
As the name implies, it’s pretty simple to set up this type of retirement vehicle. You can contribute up to $13,000 in 2019 for your Simple IRA. Those 50 and older can contribute an additional $3,000 plus either a fixed 2 percent fixed contribution or a matching 3 percent contribution.
3. SEP IRAs
A Simplified Employee Pension IRA is open to those with self-employed income. You can deduct your contributions to it and investments grow tax-deferred. You will pay taxes when you withdrawal.
One of the major advantages of a SEP IRA is that you can contribute 25 percent of your compensation to it, up to the $56,000 limit. A SEP IRA also offers flexibility, so you can contribute larger or smaller amounts depending on how the business is doing.
4. Keogh Plans
A Keogh plan is a tax-deferred retirement plan that is named after Rep. Eugene Keogh, who led the legislation creating the plans. Thanks to law and rule changes, these aren’t as popular as they used to be.
MileIQ’s blog does not constitute professional tax advice. You should contact your own tax professional to discuss your situation.