Saving up for retirement can be a challenge for those who are self employed, due to the lack of employer sponsored benefits, matching contributions, and automatic payroll deductions.
Fortunately, there are several retirement plans available for the self-employed, independent contractors, and those with non-traditional income sources.
Here are four retirement plans that can help you save a significant portion of your earnings and build a substantial nest egg for your post-retirement life.
This is undoubtedly one of the best retirement plans available for the self-employed. It allows you to contribute to your retirement account as an employee and as an employer.
You currently are allowed to contribute up to $19,500 as an employee and up to 25% of your net earnings as an employer.
The total amount you can contribute (as an employee and as an employer) is capped at $58,000.
You can get tax breaks for the contributions you make as the employee as well as the employer. Just like a regular 401(k) account, the withdrawals you make from a solo 401(k) account are also taxed.
Simplified Employee Pension (SEP) IRA
This is a variation of a traditional IRA which allows you to contribute up to 25% of your net earnings (as long as it does not exceed $57,000) every year.
Unlike a solo 401(k), an SEP IRA does not allow you to make dual contributions as the employee as well as the employer. You are allowed to contribute up to 25% of your net earnings as the employer.
Depending on your preference, you can make regular contributions every month or make a lump sum contribution once a year. You can also skip a year if needed, as the contributions are not mandatory.
Just like a traditional IRA, an SEP IRA is also funded with your pre-tax contributions, which means the distributions will be taxed.
Savings Incentive Match Plan for Employees (SIMPLE) IRA
If you are a sole proprietor or an independent contractor with no other employees working for you, a SIMPLE IRA might be a good choice for you, as it allows you to make contributions as the employee as well as the employer.
As the employee, you can contribute up to $13,500 per year towards your SIMPLE IRA.
As the employer, you can match your employee contributions up to 3% of your net earnings. The contributions are not taxed, so you have to pay tax on the distributions.
Traditional or Roth IRA
An IRA is one of the easiest retirement accounts to set up and maintain for the self-employed. Depending on your needs, you can choose to open a traditional IRA or a Roth IRA.
The biggest difference between a traditional IRA and a Roth IRA is that the former is funded with your pre-tax dollars whereas the latter is funded with your after-tax dollars.
So, the distributions from a traditional IRA are taxed (depending on the tax bracket you fall into) whereas the distributions from a Roth IRA are not taxed.
It is noteworthy that a traditional IRA has minimum required distribution rules. So, you have to withdraw funds from your account whether you need it or not.
A Roth IRA, on the other hand, does not have such requirements. So, you can let it grow untouched and leave it entirely for your beneficiaries if you so wish.