Best Retirement Plans for Self-Employed Professionals

Written By Guest Post
Last updated November 10, 2017

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August 26, 2015

Simple. Thrifty. Living.

Are you one of the 10 million Americans who own a small business, work part-time or work as a consultant/contractor?  Between 6%-7% of Americans are self-employed. Self-employment comes with a number of benefits including flexibility, being your own boss and the ability to do what you love. But these benefits also come with challenges, which include saving for retirement. So how are you supposed to save for retirement when it’s tough to pay for your business expenses? The first step is picking the right retirement plan for you.

Do you work alone? Plan to keep it that way? The SEP IRA is most likely the best fit for you. In fact, it is the most popular plan among sole proprietors.

  • You can typically open one at your bank, mutual fund sponsor or brokerage firm.
  • Low to no annual account fees.
  • You can contribute up to 25% of your net income.
  • The money you put away is free of taxes during your savings years.
  • SEP is flexible. You can wait to fund your retirement plan until you file your taxes, so if your income is higher than expected you can make a large contribution to decrease your tax costs. Or on the flip side if your year has been less than stellar you can scale that contribution back.

Do you work alone now, but hope to expand your workforce in the future? A SIMPLE IRA may be the answer for you.

  • With a SIMPLE IRA, you can keep investing in the same account even after you hire someone.
  •  You have to match your employees’ contributions, which can be up to 3% of their pay.
  •  You can invest no more than $11,500 a year ($14,000 if you’re 50 or over), which may not be enough to reach your specific retirement goals.
  • Withdrawals from a SIMPLE IRA (within the first two years) can cost you – 25% penalty fees as opposed to 10% penalty fees with an SEP.

The individual 401(k) is another good choice if you plan on staying solo in your venture and if you are starting to save for retirement late in the game.

  • The contribution formula lets you put aside more money at a lower-income level than you can with a SEP IRA.
  • The amount you save is discretionary, meaning you can save the maximum amount during high income years ($16,500-$49,000 per year) and cut back during difficult times.
  • Additionally, if you and your spouse share the plan you can double your contributions, plus if you are 50 or over you are eligible for “catch-up” contributions.
  • You also have the ability to take out a loan against your 401(k), which may be useful if your business is in need of extra funding. You can borrow up to $50,000 with a five-year repayment plan.

Both the SEPs and individual 401(k)s make it difficult for any sole proprietor who wants to hire employees, even just one employee. SEP can require expensive contributions once an employee is hired. With an individual 401(k), you’ll have to stop funding your plan or convert it to a more complicated version. Regardless of your career aspirations, saving for retirement is a must.

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