The 3 Best Retirement Plans for Self-Employed Workers - saving for retirement when self-employed, freelancer retirement plan

The 3 Best Retirement Plans for Self-Employed Workers

•  4 minute read

No one else is looking out for you or making matching contributions! So pick the best ways to save for retirement and start early.

Being self-employed is great, right? So much freedom and flexibility. But what about your future? We found the best retirement plans for the self-employed.

There are 58 million freelancers in the U.S., and the number is only growing. Between 2005 and 2015 ten million jobs were created, and 94 percent of them were freelance positions, according to research by Princeton University. I’m proud to count myself among them.

Freelance and contract positions are likely the way of the future as companies look for cheaper ways to hire workers. When companies hire freelancers, they don’t need to pay taxes or benefits on your behalf, making freelancers an attractive option to many.

That means that most freelancers are responsible for their own retirement savings.

Since we’re self-employed, we don’t have a company retirement plan set up for us. So how do we save for our future?

There are a few options that we have. While there aren’t any plans that are designed specifically for freelancers, there are certain retirement plans that work particularly well for us. (Though of course, no matter if you’re a freelancer or a W-2 employee, the best retirement practice for everyone is to start saving early and be consistent! Here are three of the best retirement plans for self-employed workers:

1. SEP IRA

SEP is the abbreviation of Simplified Employee Pension. These plans allow employers to contribute to retirement both for themselves and for their employees. These plans are available to all businesses, but are most popular with self-employed people because of their low start-up costs and high contribution rates. An SEP allows for a contribution of up to 25 percent of each employee’s pay.

In order to open a SEP plan, fill out Form 5305-SEP for your business. (The form can be found on the IRS website.) But keep in mind that if you use this form, you can’t have any other retirement plan except for another SEP. However, you do have the option of adapting the 5305-SEP form to make an individual plan. Consult a licensed professional for that.

There’s no filing requirement for the employer in a SEP plan. And only the employer may make contributions – employees aren’t allowed to. The employees own everything in their accounts – they just can’t contribute to it like they can to a 401(k) or a Roth IRA. Employees also get to decide where exactly their money is invested, giving them control over their portfolio.

 

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Contribution amounts are flexible and can vary from year to year. This allows businesses to modify their contributions according to how well business is going – another attractive option for freelancers. But contributions do need to be the same rate for all employees – if Josie gets five percent, so does Jennifer.

There are limits on how much an employer can put into the account, though. Contributions cannot exceed the lesser of either 25 percent of the employee’s compensation or $54,000 for 2017.

2. Solo 401(k)

A solo 401(k) plan functions the same ways as a traditional company 401(k). The only difference is that this plan covers either a business owner with no employees or that person and her spouse. In other words, it’s designed for self-employed folks. Solo 401(k)s are subject to the same rules and requirements as any other 401(k) plan.

The business owner is defined as both the employer and the employee in this plan. As such, contributions can be made to the plan in both roles. According to the IRS, the owner can contribute both.

  • Elective deferrals of as much as 100 percent of compensation (“earned income” in the case of a self-employed individual), up to the annual contribution limit ($18,000 in 2016 and 2017, or $24,000 if age 50 or over), and
  • Employer non-elective contributions up to 25 percent of compensation as defined by the plan, though it can vary if you’re self-employed.

Figuring out how much you can contribute does take a bit of math. The IRS provides worksheets for people to figure out their contribution rates and what their tax deductions will be. It’s a good idea to hire an accountant or CPA to make sure you’re adding as much as you can in a legal manner.

3. Roth IRA

Roth IRAs aren’t specifically for freelancers, but they’re an excellent retirement vehicle that you can take advantage of. A Roth IRA is an “Individual Retirement Account” option that’s available to anyone. Contributions are made post-tax.

As such, when you retire and start taking money out of the account, your withdrawals are tax-free.

Unfortunately, contributions to a Roth IRA are not tax deductible. Plus, you can only contribute to a Roth IRA if you make under a certain amount – $132,000 if filing as a single person, or $194,00 for married couples.

The maximum amount you can contribute annually to a Roth IRA is $5,500 for people under 50. For those 50 and up, it’s $6,500. This is designed to give a boost to those who got a late start in saving.

The Bottom Line

Saving for retirement is especially important when you’re self-employed. We’re in charge of our our own financial futures, and we need to include retirement in our plans.

Make sure you are making your money work for you. Sites like Blooom help manage 401K and Roth accounts, and may be worth researching for your particular needs. Alternatively, learning more about your investment opportunities with a program like Investopedia can help you learn more about the different options, and work a plan that’s unique to you.