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  • Writer's pictureMike Rogers

Retirement Planning for Self-Employed People

Updated: Mar 22


Retirement Planning for Self-Employed People



Retirement planning for self-employed people may seem very overwhelming.

When you have a full-time job, your retirement planning is in the form of a 401(k). But when you’re self-employed, the path is less cut and dry. However, with proper financial planning, you can retire just as early as someone with a 401(k).

This article explains how to plan for retirement if you’re self-employed.


TABLE OF CONTENTS



How to Plan for Retirement When Self-Employed


You don’t have an employer offering a 401(k), but saving for retirement is essential.

You don’t want to work forever, and you won’t be able to keep working as you age. Saving now is key to help you retire, relax, and afford a home care facility in your future. Think of saving for retirement as self-care for your future self. Planning for retirement when you’re self-employed starts with knowing your options.


Retirement Options for Self-Employed People


The freedom of self-employment offers options.

Just like you can choose how to run your business, you also have to choose what retirement account you want to open and whether to work with an advisor, a wealth management team, or do it yourself.

Traditional or Roth IRA:


IRAs are a great option if you’re just starting out and have no employees.

If you just left a full-time job, choose an IRA, because you can roll your old 401K into a Traditional or Roth IRA. Both types of IRAs offer tax benefits. The contribution limit is $6,500 in 2023.

One-Participant 401(k) i.e. Solo 401(k):


This is another great option for self-employed people who have no employees, and these can also cover your spouse.

These plans have the same rules and requirements as any other 401(k) plan. The contribution limit in 2023 is $22,500, but if you’re over 50, you can contribute $30,000.

SEP IRA:


If you have an established business with no or a few employees, the SEP IRA is a great choice.

If you have employees, you will have to contribute the same percentage for each employee—including yourself. You’ll be treated as an employee in this case. You also have to give contributions to every eligible employee, but the burden of making contributions is entirely on you. In 2023, you can contribute the lesser of $66,000 or up to 25% of compensation or net earnings. You do have a limit of $330,000.

SIMPLE IRA:


If you have a large business with up to 100 employees, we recommend the SIMPLE IRA.

This retirement plan allows employees to contribute as well. This is an easy account to open, but you make mandatory contributions to employee accounts. This may be costly if you have a lot of employees. You can contribute up to $15,500 in 2023.

Profit-Sharing Plan:


If you have a lot of employees, we recommend a Profit-Sharing Plan.

This allows you to contribute what you want to employees. However, only you will contribute to this plan, not your employees. If you have a profit-sharing plan, you can also have other retirement plans.

Money Purchase Plan:


Another option is the Money Purchase Plan.

This is a good option if you have a lot of employees. This plan allows you to grow big accounts, but you do have contribution requirements you have to follow. You’ll have to contribute certain percentages of employee’s salaries, but this may mean highly compensated employees get a lot more.


As you can see, you have a variety of options when it comes to planning for retirement. We recommend researching your options, and focusing on what type of plan is best for you at this stage in your career. You can always open a different type of account down the road.

If you do decide to work on your personal financial plan alone, here’s what you can expect.


What retirement plan works best for someone who is self-employed?


There’s no one-size-fits-all for self-employed retirement planning and wealth management.

It truly depends on you and your business.


Generally, if you have no or few employees, we recommend:

  1. A Traditional or Roth IRA

  2. One-Participant 401(k) i.e. Solo 401(k)

  3. SEP IRA


If you have a business with employees to consider, choose from:

  1. SIMPLE IRA

  2. Profit-Sharing Plan

  3. Money Purchase Plan

Again, it all depends on your circumstance. If the choice isn’t clear as you research these options, you can always work with a financial planner or advisor to help you.


Female entrepreneur planning her retirement.

There’s no one-size-fits-all for self-employed retirement planning and wealth management.


Can a self-employed person have a 401(k)?


Yes. Although you won’t have an employer-sponsored 401(k), you can still have a 401(k).


How can I open a 401(k) without an employer?


Open up a One-Participant 401(k) i.e. Solo 401(k). You can also share this account with your spouse. It will work similarly to any other 401(k).


IRA for Self-Employed People


An IRA is a popular choice among self-employed people.

You’ll enjoy tax benefits with every type of IRA, but what tax benefits you will reap depends on what type you choose. For example, with a Roth IRA, you reap tax benefits when you withdraw the money in your retirement. With a Traditional IRA, you’ll get the tax breaks when you put it in.

Overall, IRAs are great because they have less restrictions when you want to take the money out early.


You’ll also have less restrictions when you retire. Also, if you’re a disciplined saver, you’ll often be able to have more money in retirement than other types of accounts.

If you have a few employees, you can open up a SEP IRA. If you have more employees, open up a SIMPLE IRA.


Well-Positioned Retirement Plans For High-Income Self Employed People


If you earn more money, we highly recommend a SEP IRA.

With this type of account, your annual contribution cannot exceed the lesser of 25% of your total compensation or $66,000 in 2023. Obviously, you can contribute a lot more per year than someone with a Traditional or Roth IRA—they can only contribute $6,500 in 2023.


If you have employees, we recommend the Profit-Sharing Plan. This is because you can contribute what you want to your employees, and that doesn’t have to be equal to yourself. If you want to save a great amount for yourself, you have more freedom to do so with this plan.


Retirement Plans Better Suited for Self-Employed People with Employees


If you have employees, certain types of plans won’t be ideal for you.


Here are the options we recommend choosing from:

  1. SIMPLE IRA

  2. Profit-Sharing Plan

  3. Money Purchase Plan


All of these retirement accounts will help you save for your own retirement, along with your employees.


Best Retirement Plan for S Corp Owners


If you have an S Corp, we recommend choosing between:

  1. Traditional or Roth IRA

  2. SEP IRA

  3. SIMPLE IRA

  4. One-Participant 401(k) i.e. Solo 401(k)


How Do I Set Up a Self-Employed Retirement Plan?


Choose what type of account you want, then you’ll open an account with a brokerage like Vanguard or Ameritrade.

If you’re not sure what type of account to do or you want help throughout the process, work with a financial planner or advisor. They will help you with tax planning.


Key Takeaways:

  1. You can plan for retirement as a self-employed person.

  2. You have options, but getting started as early as possible is key.

  3. The plan that is best for you depends on your current circumstance.

  4. If you need expert advice and guidance, work with a financial advisor.



Mike Rogers

About the Author

Mike Rogers

Mike Rogers is the founder and president of Minnesota-based financial advisory firm 360 Financial. As the founder, Mike’s priority is that 360 Financial always serves the clients with empathy, integrity, and honesty. This unique, client-centric approach allows the firm to help clients decipher between the things they can control and what truly matters.

In other words, Mike understands that money is not the end-all-be-all; instead, it’s the “how” that fuels the “why” to the question: “What’s important to you?”


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The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.

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