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Self-Employed Retirement Options Your Future Self Will Love

You’ve hustled your heart out and now you’re your own boss. With estimates that over 25 million Americans were engaged in entrepreneurship in 2016, this is becoming a reality for many. There are definite perks: pursuing your passion, setting your own hours and maybe even working from home in your pajamas. But there is one thing that many people might miss from a traditional 9-to-5 job—a retirement package that comes free from guesswork. While it may be a bit more complicated when you are your own boss, planning for retirement is possible when you are self-employed.
Any entrepreneur who wakes up excited for their work may not think much about the retirement part. However, effective retirement planning is important for self-employed individuals. Not only can it set you up for financial freedom in your golden years, it can lead to some major tax advantages now. Choosing the right plan is so important.


A simplified employee pension (SEP) IRA is a retirement vehicle any employer, including self-employed individuals, can set up. These plans may seem like traditional IRAs at first glance, but there are significant advantages for independent contractors, sole proprietors and small-business owners. Contributions are entirely flexible. You can increase, decrease or stop funding your SEP IRA at any time. Any entrepreneur who has ever faced inconsistent income knows how daunting it is to commit to putting aside a specific amount of money every month. Flexible funding allows entrepreneurs to adjust based on cash flow and other business needs.
Other benefits are the fact that the contribution limits are significantly higher than traditional IRAs and can be funded after the year ends. Current contribution limits are 25 percent of the employee’s compensation, or $55,000 for 2018, which can be significant income deductions at tax time. Additionally, by allowing plan holders to fund SEP IRAs after the year-end, entrepreneurs and small business owners will have a much better of idea of how much money they can comfortably set aside.  


A Savings Incentive Match Plan for Employees (SIMPLE) IRA is a traditional IRA for the self-employed and small business owners. Money is also invested tax-deferred, meaning individuals will not pay taxes until the money is distributed, or collected, during retirement. Though they function similarly to a SEP IRA, there is one big bonus. If you are an entrepreneur with your sights set on growing your business, it is much simpler to add full-time employees to the plan. However, the difference in contribution limits are worth noting. Employees can defer up to $12,500 in a SIMPLE IRA (with an extra $3,000 as a “catch-up” contribution for individuals who are over 50), which is considerably less than the $55,000 limit of a SEP IRA. Those who are able to set more aside for retirement may consider looking elsewhere.

Individual 401(k)

This name might ring a few bells for any entrepreneur who previously had access to a company-sponsored 401(k). This retirement plan is another option for self-employed individuals. Individuals can also include their spouses in this plan. Partnerships are also eligible. Having part-time employees who work less than 1,000 hours per year also keeps business owners eligible. However, once employees cross that thousand-hour mark, small-business owners are no longer able to contribute to an individual 401(k).
This plan can be funded from two perspectives: elective deferrals and profit sharing, or employee contributions and employer contributions. As a result, contribution limits can be a bit complicated. The short version is if an entrepreneur chooses to make both types of contributions, they can contribute $18,500 as an employee and $36,500 as an employer, keeping their contributions below the limit of $55,000.
One of the ways individual 401(k) plans set themselves apart from SEP or SIMPLE IRAs is 401(k) accounts can be traditional or Roth. In order to pay into a Roth account, self-employed individuals use after-tax dollars, which means withdrawals can be taken tax-free in retirement. Individuals also do not have to pay taxes on investment gains while their money grows.

Self-Employed Retirement Planning

There’s no doubt about it. Entrepreneurship is not for the faint of heart. There are countless decisions to  each day. One of the most important ones is choosing a SEP IRA, SIMPLE IRA, Individual 401(k) or other retirement vehicle. While many entrepreneurs aren’t ready to hang up their careers yet, your future self will thank you for setting up a retirement plan today.
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