Planning for retirement when you’re self-employed

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Retirement planning can feel overwhelming for just about anyone — but it’s especially intimidating for freelancers and small business owners. Between the many possible options and the complex rules, finding the right retirement plan is no easy feat.

With this guide, we’re going to make the decision a little easier by providing an overview of the retirement plan options for small business owners. We’ll also compare them with the plans offered by many employers, and explain how to make the best choice for your situation and goals.

Freelance retirement planning vs. employer-sponsored plans

If you work for a company, it’s likely they offer some sort of employer-sponsored retirement plan as one of their employee benefits. This means the employer will take on the work of choosing and administering the plan, and they may offer additional benefits like matching contributions.

If you’re self-employed, you won’t have access to an employer-sponsored plan and you’ll need to choose and administer your own retirement accounts.

If you happen to work for an employer and work freelance, you may be eligible for an employer-sponsored plan but you might also want to open an individual retirement account or explore some of the retirement options that are available for solo entrepreneurs.

Individual retirement accounts (IRA)

Almost anyone can open an Individual Retirement Account or IRAs, and they’re an option to consider whether you work for yourself or an employer.

There are two basic types of IRAs to choose from, traditional and Roth.

  • Contributions to a traditional IRA are pre-tax, but you will pay taxes on the income in the future, similar to a 401(k). W* ith a Roth IRA, your contributions are taxed, but your investments will grow tax-free and you won’t be taxed when you withdraw money in the future.

The IRS sets specific limits to the amount you can contribute to IRAs (traditional and Roth combined) per year, and these limits are considerably lower than the contribution limits to 401(k)s.

Options especially for freelancers and solo entrepreneurs

There are generally two types of retirement accounts to choose from for full-time freelancers and solo entrepreneurs: SEP IRAs and Solo 401(k)s.


Overview: The Simplified Employee Pension (SEP) IRA is a retirement plan option that can be offered by employers or used to great effect by freelancers and solo entrepreneurs.

How it works: With a SEP IRA, employers (or in your case, you as the business owner) can contribute up to 25% of an employee’s W-2 earnings or 20% of net self-employment income (up to the SEP IRA contribution limit). Calculating SEP IRA contributions for self-employed individuals can be complicated, so consider consulting a tax professional for advice.

Things to keep in mind: The SEP IRA is essentially a profit-sharing vehicle, which means the employer’s contribution must be the same for all eligible employees. If you choose this plan and then hire employees in the future, that could complicate things. Also, unlike Solo 401(k) accounts, you cannot take a loan from your SEP IRA.

The Solo 401(k)

Overview: The Solo 401(k) is a retirement plan option that’s only available to self-employed folks without any employees. If you’re a full-time freelancer, a solo entrepreneur, or you run a business with your spouse (but no employees), you’re eligible to open a Solo 401k).

How it works: If you set up a Solo 401(k), you get to make contributions as both “the employee” and “the employer” (both of which are you!). In 2019, you can contribute up to 100% of the first $19,000 ($25,000 if age 50 or older) of W-2 compensation or net self-employment income. In addition, you can also make a profit-sharing contribution of 25% of W-2 wages or 20% of net self-employment up to the total yearly contribution limit of $56,000 (in 2019).

Things to keep in mind: Making contributions as two separate entities allows you to stash significantly more money in your retirement account. That means Solo 401(k)s are a great option if your business is growing and you’re earning enough revenue to make the maximum “employer” contribution, or if you simply want to save a significant amount for retirement.

A Solo 401(k) also has the added benefit of permitting loans against your retirement, unlike a SEP IRA.

Solo 401(k)s can come with additional administrative responsibilities and fees, but the advantages are often worth the additional hurdles.

How do I set up an IRA, SEP IRA or Solo 401(k)?

Over the past few years, new technology and services have increased the options for folks looking to open a new IRA. More and more providers are offering fee-free accounts that are easy to open and easy to manage.

Here are just a couple of the resources available to help you compare your options:

What’s next?

Remember that once you set up and fund your account, you will also need to research and understand your investment options within the plan and then create a strong portfolio.

Here’s a handful of useful resources you can use to get started on that project:


Hi there! This post exists to offer you (hopefully) useful information but it cannot take the place of personalized professional advice. Please consult a qualified expert if you have questions about your business. Also, Azlo doesn’t endorse any third-party sites that are linked here.

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