Retirement Planning for the Self-Employed

More and more people are self-employed. There were over 15 million self-employed Americans in the workforce in 2015 – freelancers, consultants, healthcare providers, you name it – and that number is expected to balloon to over 40 million by 2020. The growth in self-employment coincides with another, less positive trend: the failure of Americans to plan for retirement.

Over thirty percent of middle class Americans are expected to run out of money when they retire. In fact, a significant portion of the workforce has given up on the idea of retirement altogether; the number of people 75 and older who are still working, largely because they have no other choice, is at an all time high.  The self-employed, for all of their rugged individualism and independence, are decidedly short-sighted when it comes to retirement planning. Nearly thirty percent of the self-employed fail to plan for retirement at all, compared to just ten percent of people working in traditional jobs.

It doesn’t have to be this way. If you are self-employed, you can still have a great retirement. There are many tax-deferred retirement plan options available that allow you to save and invest now, while you’re working, and reap the benefits later on, when you are retired and presumably in a lower tax bracket. And now is the time to start preparing for that retirement. Here are four retirement plans to think about as you start laying down the groundwork for a great second act.



One of the most widely used methods for the self-employed to save and invest for retirement is through an individual retirement arrangement, or IRA. IRAs are relatively easy to establish, and are available through most larger banks and investment companies. With an IRA, an individual can save and invest up to $5,500 annually in the account, which can hold a wide variety of investments; people 50 and over can contribute up to $6,500 annually. Standard IRA’s are tax-deferred, meaning that annual contributions can limit an investor’s exposure to income taxes while working. Upon retirement, when funds are withdrawn, the individual will have to pay taxes on the funds, with the idea being that the retiree, now earning less, will have a lower tax burden. There is also a variety of this plan called the Roth IRA, in which taxes are not deferred each year, but there are no taxes due when funds are withdrawn at retirement. While these plans are relatively easy to establish and widely available, other plans allow for the self-employed to save more money each year in a tax-deferred account.

The Simplified Employee Pension

If you are self-employed, you are eligible to establish a Simplified Employee Pension, or SEP. A SEP plan will allow you to contribute 25% of your net earnings, up to $53,000, into your retirement account. It is relatively straightforward to set up, too: Identify a bank or financial institution that offers a SEP-approved plan, fill out the required IRS Form, and establish the plan. Withdrawals from a SEP plan are similar to other types of retirement plans. One drawback of a SEP, compared to other retirement plans, is that contributions are tied to net earnings; if your business reports a loss in a given year, you cannot contribute to your SEP plan.

Solo 401(k)

A single-participant 401(k), or solo 401(k), operates much the same as those 401(k) plans offered by many employers today. A solo 401(k) allows the standard tax-deferred contribution annually to the plan (up to $18,000 in 2016). Additionally, a solo 401(k) allows you to contribute an additional 25 percent of your net earnings, up to $53,000, to the plan as well. These plans are easy to establish, and are offered by many major financial institutions. Like the aforementioned IRAs, these plans offer a Roth option as well. It is truly an investor’s choice as to where you establish your solo 401(k), so do some research and find the right plan for you.

Savings Incentive Match Plan for Employees (SIMPLE IRA)

A SIMPLE IRA allows self-employed people to contribute up to $12,500 to their retirement plans ($15,500 for those 50 and over). These plans are relatively easy to establish (SMPLE!), and are offered by most major banks and financial institutions. They are likely a good fit for self-employed people who want a low maintenance retirement account, and are not going to contribute as much as they would be allowed under the other plans. However, like SEP, contributions are tied to net earnings, and they do not offer any sort of Roth option that is available in 401(k) plans. There is also a substantially higher withdrawal penalty with a SIMPLE IRA compared to other plans as well.

Social Security

Social Security is another variable to factor into your retirement planning. Self-employed people actually pay a higher percentage of their income into Social Security taxes than traditional employees do, since for traditional employment arrangements, employers are responsible for part of their employees’ Social Security tax burden. However, upon reaching retirement age at 62 the self-employed are eligible to begin receiving their Social Security benefits. Foregoing those benefits until later (up to age 70) can increase your Social Security income substantially. Choosing how and when to begin receiving these benefits requires careful thought and consideration. Social Security’s Website has a plethora of reference material, and even an  app that can help you begin factoring these benefits in to your retirement planning.

Planning for retirement can be challenging for the self-employed. But if you’ve already beaten the odds once and established a viable business, you can successfully prepare for a great second act, too. IRA;s SEPs, SOLO 401(k)s, and SIMPLE IRAs are all great plans that can provide a means for you to invest in your future even as you are running your business. Roth options on some of these plans give you greater flexibility in dealing with taxes, too. So make a plan for where, when, and how you want to retire, do some research, and choose an effective retirement plan that allows you to save for the future. And don’t wait until tomorrow; the time to start planning for retirement is right now.

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One Comment

  1. Hi Will, I am Grace from Retirement Planning IQ, I really appreciate your article. In my opinion, the best way to save money for retirement is through 401k and other vehicles that allows us to save automatically.

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