Saving For Retirement When You’re Self Employed

We usually talk about the importance of saving for retirement by taking advantage of employee pensions, employer-matching, getting a personal IRA and maximizing your tax deductible contributions. But what if you are self-employed?

Is the self-employed freelancer or business owner a lost cause when it comes to retirement? No, of course not. While the joys of self-employment are many – you set the focus of your time and dress code, the only upper-management breathing down your neck is your own conscience and work-ethic

– your independence means you are wholly responsible for the course of your financial well-being. And unfortunately, self-employment can come with a level of financial unpredictability making it difficult to plan for retirement entirely on your own.

According to a recent survey by TD Ameritrade, there are currently more than 10 million self-employed Americans, a 14% increase since 2001. Unfortunately, a substantial 40% of self-employed workers admit they save for retirement only sporadically and scarier still, nearly 28% of the self-employed say they aren’t saving for retirement at all.

Why Aren’t the Self-Employed Saving Money?

The reasons given for not saving towards retirement will not be a surprise to anyone who is self-employed. The most common reasons include:

  • A Lack of Steady Income
  • Need to Pay off Major Debt(s)
  • Healthcare Expenses
  • Education Costs or Student Loans
  • Business Costs

How Much Should You be Putting Away?

Experts often suggest workers should be saving 15 to 20 percent of their annual salary for retirement. That can be a challenge for anyone, of course, but when you’re self-employed, cash flow can be inconsistent – checks from clients may arrive when expected or not at all, money transfers can take time and all the while, merchant fees are eating into any profits. Even if you can pay your bills, extra money may go right back into the business.

Regardless, you need to invest in yourself and your future, even if it means living frugally while you are still working. To get started, you will need to become familiar with the various retirement plans best suited to the self-employed. Then speak with a trusted financial advisor to pick a (or several) retirement accounts which best suit your personal financial situation and goals.

Retirement Savings Options For the Self-Employed

There are four retirement savings options favored by the self-employed for their tax-deductible contributions and the possibility of deferring taxes on the savings income until it is time to cash out at retirement.

Individual 401(k)

Also called an solo 401(k), the individual 401(k) is similar to a traditional 401(k), but is reserved for business owners with no employees, other than a spouse working for the business. With a solo 401(k), you may be eligible to contribute as both the employee and the employer, giving you a higher limit than many other saving plans.

As the employee, you can contribute up to $17,500 or $23,000 if you are over 50. As the employer, you can add an additional 25% of your net income, to a maximum of $52,000 or $57,500 if you’re 50 or older. To avoid penalties you cannot withdraw from the account until you are 59½, although there are exceptions.


The Simplified Employee Pension (SEP IRA) is a simple account suitable for one-person business or small businesses with a few employees. Most banks and brokerage firms offer these accounts.

The business can contribute up to 25% of each employee’s income, to a maximum of $52,000 for 2014. To avoid a 10% fine and taxable event, you should not withdraw money from a SEP IRA before you are 59½ years old.


The Savings Incentive Match Plan for Employees (SIMPLE IRA) are similar to SEP IRA, however the employees may also make contributions to their retirement savings along with employers. The employer is required to contribute dollar-for-dollar up to 3% of each eligible employee’s income to the plan each year that the employee contributes to the fund.

While a SIMPLE IRA is easy to establish and operate, the limit of $12,000 ($14,500 if you are over

  • annual contribution, plus the requirement to match employee’s contributions, makes a SIMPLE IRA best for those with no employees and an annual income of less than $45,000. Again, there is a 10% penalty for withdrawals before the age of 59½.

Roth or Traditional IRA

Most individuals (with an adjusted gross income less than $105,000 for a single filer or $166,000 for married filing jointly) are eligible to open a Roth IRA or Traditional IRA. Contributions to a Roth IRA are made with after-tax dollars – taxed up front – so your withdrawals should be tax-free.

Unfortunately, these accounts come with low contribution limits of $5,000 ($6,000 if you’re 50 or older) which is not enough to cover your entire retirement needs.

Self-employed individuals may need to participate in more than one retirement savings vehicle to reach their long-term goals for the future. Just be sure to work with your trusted financial advisors to manage retirement contribution limits and other saving or investments.

Take Control of Your Retirement as You Control Your Business

Running your own business provides you the joy and freedom to make your own decisions, create your own income and establish financial priorities, but it usually means you are alone when it comes to planning for retirement. Continue your financial education and speak with a financial advisor, tax expert or legal counsel to choose the right retirement accounts or combination of investment and savings to ensure you have a chance at a happy, well-funded retirement.

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