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Retirement Plans for

Anyone Self-Employed

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Self-employed

Freelancer, independent contractor, etc

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Full-time or part-time W-2 employee

Business owner

LLC, S corp or partnership

How retirement plans work for freelancers?

When it comes to planning for retirement, it may seem like something that you can put off. But the sooner you start saving, the better prepared you will be when it comes time to retire. Life is unpredictable, and having a retirement plan in place can help relieve some of life’s stress. When you work for an organization or company, they usually match a certain percentage of your salary towards retirement contributions. But when you’re self-employed, you’re responsible for settiņg up a retirement account and contributing to a retirement plan. Setting up a retirement plan can reduce your taxable income and secure your retirement future. It will ultimately help you save on self employment taxes too. There are several options to choose from with their own requirements. There’s the SIMPLE IRA, SEP IRA, solo 401(k) and Keogh plan. Here are all the details on self-employed retirement plans to ensure you’re prepared for the future.

Table of contents

Key Takeaways:...Read more

Difficulties of saving for self-employed retirement plans...Read more

Retirement plans for self employed...Read more

How to open a 401(k)?...Read more

Key Takeaways:

Saving for retirement takes dedication and some things can derail your savings plan
There are 4 different types of retirement plans
Opening a 401(k) can help with retirement savings

Difficulties of saving for self-employed retirement plans

Saving for retirement can seem like the least of your worries with many other financial obligations. With rising inflation costs, high-interest rates and lows in the stock market, it can seem impossible to get ahead. Besides any family expenses you might have (like childcare, vehicles, tutoring, therapy, home improvements, etc.), there are a lot of other expenses that self-employed people are responsible for paying. Some expenses include:

Business startup costs
Debts or loans
Self-employment tax
Training or licenses
Health care
Advertising

Despite the challenges and sacrifices that come with being self-employed, like quarterly tax payments, it’s also an opportunity to reevaluate your work goals and retirement plans.

Image of FLYFIN with text on saving for retirement in challenging times. Tips include adjusting savings plan, rebalancing portfolio, staying active in the market, and switching to a Roth conversion.

Retirement plans for self employed

When it comes to setting up self employed retirement plans, the reality is that you won’t have any assistance from human resources (HR) or a company-sponsored plan. Your employer won’t be matching your contributions, no deductions from payroll and no company stock shares. But how much you contribute depends on how much you earn. One way to look at retirement saving is to think of it as a business expense and consider it as part of your finances when setting aside funds for your 1099 tax payments. There are four self employed retirement plans that you can choose from.

Each IRA for self employed has their own set of requirements and limitations and it’s up to you to decide which one is right for you. SIMPLE IRA Anyone self-employed has the option to open a SIMPLE IRA. It’s easier to set up compared to other self-employed retirement plans. In order to qualify, a business needs to have 100 employees or less who are earning at least $5,000. Employees have the option to have the amount automatically withdrawn from their paycheck towards their SIMPLE IRA. You can contribute up to $14,000 annually into your SIMPLE IRA. If you’re contributing to your SIMPLE IRA as the employer, you can put in a 2% nonelective contribution or 3% matching contribution. The rules of the traditional IRA apply to the SIMPLE IRA, meaning it's tax-deferred and has the same rules for withdrawals. SEP IRA The Simplified Employee Pension Plan (SEP) is a great option if you have employees working for you. You can contribute to this SEP IRA account even if you’re a sole proprietor, independent contractor, a corporation like C Corp or S Corp or a partnership. The rules of a traditional IRA apply to the SEP IRA, so it’s a great way to avail tax-deferred savings. Employees can’t contribute to this account and this responsibility falls to the employer. The rules for SEP IRA compensation are a bit complicated and the caps can vary from 0% to 25%. The maximum compensation cap for the SEP IRA for 2023 is $66,000. Keogh plan Another self-employed pension plan is the Keogh plan, which is available for those self-employed or for an unincorporated business. Any contributions made to the Keogh plan can be made with pre-tax dollars. The three most common contribution Keogh plans are:

Qualified defined benefits
Money purchase
Profit-sharing

A qualified defined benefits plan provides annual benefits if you’re retired. The amount depends on how many years you worked. With a money purchase plan, companies have to make a contribution, even if they don’t have any profits. The cap on the contribution is 25% of compensation. Profit-sharing plans also allow companies to contribute up to 25% compensation. The amount may be more for those 50 or older.

How to open a 401(k)?

A Solo 401(k) or self-employed 401(k) is an individual 401(k) plan without the need for an employer and is one of the great self employed retirement plans. It’s a great option for those that don’t make a lot of money and work solo in their business. This option can cover your spouse too. According to the IRS, you can’t contribute to this plan if you have full-time employees. There aren’t any age restrictions but you must be the business owner. There are contribution limits set in place for 2023 is $66,000 and an extra $7,500 for those aged 50 or older. There’s also different contribution limits for both the employer portion of the contribution and the employee portion.

Alt text: Image displaying contribution limits for solo 401(k) for employees and employers. Includes maximum contribution amounts and limits on compensation for 2022.

When it comes to the solo 401(k) and tax deductions, you have two options. The first is the traditional method, which allows you to subtract your contributions from your taxable income amount. But your distributions in retirement are taxed as income. Or the Roth 401(k) option which doesn't provide any tax benefits, but your distributions in retirement are tax-free. This option has been labeled as the best IRA for self employed people and is a great option if you’re expecting a higher income in retirement. Even if you contribute to a SIMPLE IRA or SEP IRA, you’re still eligible to contribute to a Roth IRA self employed plan. But with anything, there are rules and penalties set in place by the IRS if you want to withdraw the money before the age of 59 ½. You could consider a Roth IRA if you’re starting a business in your 30s and you think your income will increase gradually. But if you're in your 50s, you might want the tax deductions now if you plan to sell your business once you retire

Quick tip

When considering the amount of contribution to make, be sure to count yourself as both the employer and the employee.

Adjusted Gross Income

A lot of terms get thrown around when it comes to the tax season and your adjusted gross income (AGI) is one of them.