Self-Employed Retirement Savings

One drawback to being selfemployed is not having an employersponsored retirement plan, such as a 401(k). But the self-employed can still save with traditional and Roth IRAs, and can save in regular taxable accounts, as well.

In addition, there are special retirement plans for self-employed folks — such as the SEP IRA, the SIMPLE IRA and the Solo 401(k) plan. Each lets you deduct your contributions from your taxable income, and those contributions will grow on a taxdeferred basis until the money is withdrawn. Solo 401(k)s also offer a Roth version, where your contributions are made with post-tax money (offering no deduction), and your withdrawals in retirement are tax-free.

A SEP (Simplified Employee Pension) IRA lets employers or selfemployed people contribute far heftier sums than even most 401(k)s allow. For 2020, the contribution limit is the lesser of 25% of compensation or $57,000. It’s easy to set up and has low administrative costs.

A SIMPLE (Savings Incentive Match PLan for Employees) IRA is another retirement plan that selfemployed people can set up for themselves. (Small businesses can set them up for employees, too.) The contribution limit for employees is $13,500 in 2020, plus $3,000 more for those ages 50 and up. An additional employer matching contribution of up to 3% of income is also allowed.

A Solo 401(k) plan, also known as a One-Participant 401(k) plan, is a traditional 401(k) plan for a business owner, or for the owner and his or her spouse. The owner can make both elective-deferral contributions from compensation of up to $19,500 in 2020 ($26,000 for those ages 50 and up) and employer nonelective contributions, with all contributions (except catch-up contributions of those 50 or older) totaling no more than $57,000.

Each of these plans has a few more rules to know about regarding how to set them up, contribution limits and withdrawals. Learn more before deciding which is for you, because the rules or limits might make one option better than others. However you go about it, it’s vital to be saving and investing for your future.