6 Ways to Save for Retirement When You’re Self-Employed

6 Ways to Save for Retirement When You’re Self-Employed article image.

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Being self-employed has plenty of perks, from choosing your own hours to working in your pajamas. But one perk you may miss from working for an employer is having a retirement plan through work. Fortunately, there are ways to plan for a secure retirement even without a 9-to-5 job. If you're self-employed, you can start saving for retirement with a SEP-IRA, SIMPLE IRA, traditional or Roth IRA, or a one-person 401(k) plan.

Retirement Plans for Self-Employed Individuals

Those who are self-employed have many options when it comes to saving for retirement, including some of the same savings vehicles open to employees, such as 401(k) plans. You can set up any of the plans below through a bank, mutual fund or brokerage.

One-Participant 401(k)

Sometimes called "solo 401(k)," "individual 401(k)" or "uni-401(k)," 401(k) plans for one participant work just like a workplace 401(k): You make pretax contributions and are taxed when you begin making withdrawals, which you can do starting at age 59½.

You can contribute to a one-person 401(k) twice: once as an employee of your own business and again as an employer. As an employee, you can put up to 100% of your annual earned income into the plan, up to a maximum of $19,500 in 2021 (those ages 50 and up can make an additional catch-up contribution of $6,500). You can then make a contribution as an employer of up to 25% of your maximum contribution limit. You'll need to use an IRS worksheet to calculate that limit. For 2021, the maximum employer contribution is $58,000 (not including catch-up contributions).

Traditional or Roth IRA

Traditional and Roth IRAs differ in their eligibility rules, tax treatment and when money can be withdrawn without a tax penalty.

Traditional IRA: Contributions to a traditional IRA are generally tax-deductible unless you or your spouse has access to a workplace retirement plan or your income is above a certain threshold. You pay taxes when you withdraw the money, which you can start doing at 59½. (In some situations, you can withdraw money earlier without penalties.) You must start withdrawing money at age 72.

There are no upper income limits on who can contribute to a traditional IRA, and you can contribute until age 70½. However, annual contribution limits are fairly low—just $6,000 for 2021 ($7,000 for those age 50 and up).

Roth IRA: With most other retirement vehicles, you contribute pretax income that gets taxed when you withdraw the money in retirement. Roth IRAs work a bit differently: Contributions are made post-tax, but can be withdrawn at any time, tax-free. Withdrawn earnings are generally subject to taxes and penalties if you are under 59½ and have had the account less than five years, except in certain situations. Once you're 59½, they can be withdrawn tax-free too.

You can contribute to a Roth IRA your entire life and never have to withdraw money from it—you can leave it to your heirs.

For 2021, the maximum contribution to a Roth IRA is $6,000 ($7,000 for those ages 50 and up). There are other financial restrictions: You can't contribute to a Roth IRA if you have a modified adjusted gross income (AGI) of $208,000 or more (if married) or $140,000 or more (if single). Your maximum contribution is reduced if you're married with a modified AGI of at least $198,000 but less than $208,000, or single with a modified AGI of at least $125,000 but less than $140,000.

Simplified Employee Pension (SEP)-IRA

An SEP-IRA is an IRA designed for self-employed people. For 2021, you can contribute up to 25% of your net earnings from self-employment or $58,000, whichever is less. (You'll need to do some calculations to determine your contributions.) Contributions are tax-deductible.

SEP-IRAs have higher contribution limits than many retirement plans, so you can save faster, but they don't allow catch-up contributions.

Savings Incentive Match Plan for Employees (SIMPLE) IRA

If you received at least $5,000 in compensation from your business in each of the previous two years, you can make pretax contributions to a SIMPLE IRA. As of 2021, up to $13,500 of your net earnings from self-employment can go into the plan. (If you're 50 or older, you can put in an extra $3,000.) In addition, you can either contribute up to a 3% match of your net earnings from self-employment, or make a fixed contribution of 2% of net earnings from self-employment that don't exceed $290,000 for 2021.

Other Investment Options

Once you have your retirement savings on track and a flush emergency fund, you may want to consider making other investments, such as stocks, bonds, mutual funds or exchange-traded funds, or real estate investment trusts (REITs).

Non-retirement investment accounts let you invest as much money as you want, depending on your budget and the level of risk you're comfortable with. If you're a confident investor, you can open an online brokerage account and manage your own investments, or have a financial advisor or robo-advisor handle it.

How Much Money You Should Have Saved at Every Age

Are you on track to have enough saved for retirement? Since expenses generally decline in retirement, investment company Fidelity suggests your nest egg should be able to replace 45% of your pre-retirement income. However, according to the National Institute on Retirement Security reports, Social Security only replaces about 40% of your pre-retirement income. Some experts even recommend saving enough to cover 70% to 90% of your preretirement income.

In general, here's what Fidelity recommends you should have saved at every age:

  • By age 30: The equivalent of your current annual salary
  • By age 40: Three times your annual salary
  • By age 50: Six times your annual salary
  • By age 60: Eight times your annual salary
  • By age 67 (the age at which you can start collecting full Social Security benefits): 10 times your annual salary

Fidelity also advises putting 15% of your gross annual income into retirement savings and investing half of that savings in stocks. Depending on your age, when you hope to retire and your desired retirement lifestyle, you may need to save more or less than the standard recommendations. For example, if you're 40 years old or older, consider upping your contribution to 20% of your gross annual income.

Plan Now for a Secure Retirement

Self-employment puts you in control of your life—but it could require some extra legwork when securing your financial future. The earlier you start saving for retirement, the longer your money will have to build compound interest. Making a financial plan, by yourself or with help from a financial advisor, can help you prepare for your golden years and create a budget to save for the future.

Reducing debt and maintaining a good credit score can also help ensure smooth sailing in retirement. You can get your credit report for free from all three consumer credit bureaus through AnnualCreditReport.com. You can also check your credit report and FICO® Score based on Experian data for free through Experian. Keeping close tabs on your credit helps make sure you're prepared for any borrowing you want to do in the future. Many retirees want to buy or rent a new home, use credit cards to travel or pay off medical bills. Good credit can make it easier to achieve these and other financial goals.

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