Having a plan for how you’ll fund your retirement is key—unless you want to work well into your golden years. Here’s what to do if you’re self-employed.

Best Retirement Savings Strategies for the Self-Employed: IRA v. 401k and more

If you’re one of the growing numbers of #bosses working independently in a freelance, consultant, or entrepreneurial role, you are blessed with certain advantages: autonomy, the pursuit of passion, and freedom from routine, to name a few.

But one benefit you’re missing? No 401(k).

Not familiar with this perk? It’s an employer-sponsored retirement account that allows employees to sock away pre-tax dollars, lowering their taxable income and building a nest egg at the same time.
If you find yourself without this option, you’re not alone.

In fact, about 53 million Americans—or 34 percent of the total U.S. workforce—are independent workers, and this number is expected to surge to 50 percent by 2020.

Having a plan for how you’ll fund your retirement is key—unless you want to work well into your golden years. Here’s what to do if you’re self-employed.

If you are your own boss…

You can contribute 25 percent of compensation—up to a maximum of $55,000 for 2018 — to a simplified employee pension plan.

Wondering where to begin? Set up an account with an investment firm, such as Fidelity, T. Rowe Price, or Vanguard.

You have until the due date of your tax return in April to open and fund an SEP.

Long-term benefit: Contributions to an SEP are tax-deductible and grow tax-deferred, which means whatever amount you contribute to this account is sheltered in a nice little bubble from income taxes until you withdraw it in retirement.

If you want to bank a bundle…

You can potentially set aside even more with a solo 401k because you act as both employee and employer.
As an “employee” (even though you’re self-employed), you can contribute up to $18,500, plus 25 percent of your compensation as a sole proprietor (business owner). Cha-ching!

Just keep in mind that combined contributions can’t exceed $55,000 for 2018.

Long-term benefit: Like with an SEP, contributions to a solo 401k are tax-deductible (so you can reduce the amount you have to pay to Uncle Sam come tax time). But unlike an SEP, this plan also allows you to contribute more at lower income levels because you can set aside a percentage of income and an “employee” contribution.

If you’re not keen on paying taxes now…

An individual retirement account (IRA) will let you defer paying income tax on as much as $5,500 annually (if you’re under 50, otherwise the limit is $6,500).

Why would you want to defer? Well, besides the obvious immediate savings, you may find yourself in a lower tax bracket by the time you go to withdraw the funds because you’re retired.

Long-term benefit: You might be thinking, How will I ever be able to retire by contributing just $5,500 per year? Look at it like this: If you put away $5,500 each year with an average annual return of 6 percent, within 20 years, you’ll have $214,460 in your IRA. (Only more of a reason to start now…)

If you want to get the taxes out of the way…

Open a Roth IRA. With a traditional IRA, you don’t pay income tax until you withdraw from the account. With a Roth IRA, you’re putting away post-tax dollars.

That means you pay taxes on the money as you contribute to the account, and when you decide to withdraw the funds decades later, you’re getting the entire amount, no more taxes applied (so long as you’ve held the account for five years, and you’re at least 59½).

Long-term benefit: Roth IRAs let your money grow (and grow, and grow!) tax-free until you’re ready to withdraw.

—Hey Nav.igator, just so you know, we have financial advisors reviewing our content, but our articles are only meant to be educational. Consider this friendly information, not financial advice (talk to a professional for that!).

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