Retirement Savings Options for the Self-Employed
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Yes - you can still save for retirement when you are self-employed. From SEP IRAs to Single 401ks, I break down all of your options along with the pros and cons.
IRA or Roth IRA
Number of Employees: Not applicable, these are individual plans.
Who contributes?: The individual.
Contribution limit: Up to $6,000 in 2020, plus a $1,000 catch-up contribution for those 50 or older.
Pro: Simple to open and manage, cheap to maintain.
Con: The contribution limit is low. Once you begin to gain the capacity to save more, you will want to look at one of the other options below with higher contribution limits. There are also income limitations imposed to be able to save to a Roth IRA or to be able to receive a tax deduction for a Traditional IRA contribution.
Simplified Employee Pension (SEP) or SEP-IRA
Number of Employees: Any number is fine.
Who contributes?: The employer only.
Contribution limit: The lesser of $57,000 in 2020 or up to 25% of compensation or net self-employment earnings, with a $285,000 limit on compensation.
Pro: Simple and cheap.
Con: Employees are 100% vested in the SEP-IRA and you need to contribute the same percentage to everyone, so this may not be the best plan if you have high employee turnover or you have a lot of employees.
Simple IRA
Number of Employees: 100 or fewer.
Who contributes?: The employer and the employee.
Contribution limit: Employees can save up to $13,500 in 2020 (plus a $3,000 catch-up contribution for those 50 or older). An employer can choose to either make a dollar-for-dollar match of up to 3% of the employee's pay or contribute 2% of compensation, whether the employee contributes or not.
Pro: Simple and cheap.
Con: Employees are 100% vested in the Simple IRA, so again, this may not be the best plan if you have high employee turnover.
Self-Employed / Solo / Individual / Single / Uni 401k or Roth 401k
Number of Employees: Just the owner and his / her spouse.
Who contributes?: The owner and his / her spouse.
Contribution limit: Up to $57,000 in 2020 (plus a $6,000 catch-up contribution for those 50 or older) or 100% of earned income, whichever is less.
Pro: Cheap to set up and administer. Can choose the Roth Option.
Con: You need to file paperwork with the IRS each year once you have more than $250,000 in your account. 401k plan limits are per individual, not per plan, so if you are maximizing your savings to a 401k at work, you can't save to another solo-401k for a side gig that is earning money.
401k or Roth 401k
Number of Employees: 1 or more
Who contributes?: Employer and employees
Contribution limit: 100% of your compensation or $19,500 (plus that $6,000 catch-up contribution, if eligible), whichever is less.
Pro: You can set up vesting schedules, as the employer, to encourage lower employee turnover and employees can save more than they can in other plan.
Con: More paperwork, more expensive, and an annual filing requirement. Similar to above, 401k plan limits are per individual, not per plan, so if you are maximizing your savings to a 401k at work, you can't save to another 401k for a side gig that is earning money.
Originally published 1/2014
Linda Rogers, CFP®, EA, MSBA is the owner and founder of Planning Within Reach, LLC (PWR). Originally from New Jersey, Linda services clients throughout San Diego county and nationwide. She leads the design of PWR's investment portfolios which utilize broad, low-cost investments that integrate environmentally, socially, and governance (ESG) factors.
Planning Within Reach, LLC (PWR) is a fee-only and fiduciary wealth management firm offering one-time comprehensive financial planning, ongoing impact-focused investment management and tax preparation services in San Diego and nationwide. PWR is a woman-owned firm that specializes in busy professionals and impact investors. Planning Within Reach, LLC and their advisors do not receive commissions and do not hold any insurance licenses or brokerage relationships.