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Retirement Options For the Self-Employed

February 19, 2019 · 7 minute read

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Retirement Options For the Self-Employed

Being your own boss is great. You get flexibility and the ability to pursue the things you care about. But as the boss, you also have to deal with all the administrative and financial details your employer would typically take care of—like choosing the right retirement plan.

Contrary to what you might think, self-employment doesn’t mean you shouldn’t save for retirement or that you don’t have options for self-employed retirement plans. In fact, there are a number of retirement options for the self-employed and some self-employed retirement plans actually have high contribution limits and tax benefits.

And it’s a good thing too, since more people than ever are self-employed or starting their own businesses. According to Fresh Books’ annual self-employment report, 27 million Americans are expected to leave the traditional workforce for self-employment in the next two years.

So what does retirement for self-employed people look like? Well, a little like retirement for the traditionally employed. The general rules of thumb still apply: You can calculate how much you’ll need to save for retirement based on your current age and when you plan to retire.

Take a look at SoFi’s retirement calculator to hypothetically see how much money you could be contributing to your retirement and if you’re on track for your age. When you’re self-employed the only difference when it comes to saving for retirement is that the retirement account isn’t managed by your employer—because your employer is you!

Self-Employed Retirement Plans

In some ways, self-employed retirement plans aren’t too different from regular retirement plans. Certainly, the principles of retirement are the same: set aside money now to use in retirement—ideally providing an income when it’s time to retire.

The most common retirement savings plan, though, is a 401(k), but a 401(k) is, by definition, an employer-sponsored retirement account. For those who are self-employed that’s not an option.

The IRS breaks down a number of retirement plans for the self-employed or for those who run their own businesses, which used to be referred to as Keogh plans, but we’ll lay out the basics here for you to start thinking about.

Traditional or Roth IRA

One of the most popular self-employed retirement plans is an IRA—or an individual retirement account. Anyone can open an IRA either with an online brokerage firm or at a traditional financial institution. And if you’re leaving a regular job where you had an employer-sponsored 401(k), then you can roll it over into an IRA.

If you meet eligibility requirements, once you have an IRA set up, you can contribute up to $5,500 annually, with an additional $1,000 catch-up contribution allowed for those over 50 years old.

The main difference between a traditional IRA and a Roth IRA is when the taxes are paid. In a traditional IRA, the contributions you make to your retirement account are deductible when you make them, but then the withdrawals during retirement are taxed at ordinary income rates.

In a Roth IRA, there are no tax breaks for your contributions, but you’re not taxed when you withdraw. Choosing which one makes sense for you often depends on what you’re earning now v. what you expect to be earning when you retire. A financial advisor can typically help you weigh the pros and cons. Additionally, you can only contribute to a Roth IRA if your income is below a certain limit .

Solo 401(k)

A solo 401(k) is a self-employed retirement plan that the IRS also refers to as one-participant 401(k) plans . It works a bit like a regular employer-backed 401(k), except that in this instance you’re the employer and the employee.

In 2018, you can contribute a total of $55,000—plus an additional $6,000 for those over 50 years old—or 100% of your earned income, whichever is less. Think of this as your contributions to the 401(k) plan both as the employee (which is you) and as the employer of yourself (which is also you).

You can contribute up to $18,500 in salary deferrals (plus the $6,000 if you’re over 50) as you would normally contribute to a standard 401(k). Then, as the employer, you can also contribute up to 25% of your net earnings, with additional rules for single-member LLCs or sole proprietors. All of it can not exceed a total of $55,000 in contributions.

From there, it works more or less like a regular 401(k): the contributions are made pre-tax and any withdrawals or distributions after the age of 59-and-a-half are taxed at the regular rate. You can also set up the plan to allow for potential hardship distributions under specific circumstances, like a medical emergency.

You can not use a solo 401(k) if you have any employees, though you can hire your spouse so they can also contribute to the plan (as an employee and you can match their contributions as the employer). The contribution limits are per person, not per plan, so if either you or your spouse are enrolled in another 401(k) plan, then the $55,000 limit per person would include contributions to that other 401(k) plan.

A solo 401(k) makes the most sense if you have a highly profitable business and want to save a lot for retirement, or if you want to save a lot some years and less others. You can set up a solo 401(k) with most wealth management firms, and you will have to file paperwork with the IRS annually after you exceed $250,000 in the 401(k) account.

Simplified Employee Pension (or a SEP IRA)

A SEP IRA is an IRA with a simplified and streamlined way for an employer (in this case, you) to make contributions to their employees’ and to their own retirement.

In 2018, you can contribute up to $55,000 or 25% of your net earnings, whichever is less. As is the case with a number of these retirement for self-employed options, there is a cap of $275,000 on the compensation that can be used to calculate that cap. You can deduct your contributions from your taxes, and your withdrawals in retirement are taxed as income.

The key difference in an SEP v. the other self-employment retirement plans discussed so far is this is designed for those who run a business with employees. You have to contribute an equal percentage of salary for every employee (and you are counted as an employee). That means you can not contribute more to your retirement account than to your employees’ accounts, as a percentage not in absolute dollars. On the plus side, it’s slightly simpler than a solo 401(k) to manage in terms of paperwork and annual reporting.


SIMPLE stands for Savings Incentive Match Plan for Employees and is like a SEP IRA except it’s designed for larger businesses. Unlike the SEP plan, the employer isn’t responsible for the whole amount of an employee’s contribution. Employees—others in addition to you—can also contribute to their own retirement as salary deferrals out of their paycheck.

You, as the employer, have to simply match contributions up to 3% or contribute a fixed 2%. This sounds complicated, but the point is it’s designed for larger companies, so that you can manage the contributions to your employees’ retirement plans as well as your own. The trade-off, however, is the maximum contribution limit is lower.

You can contribute up to $12,500 to your SIMPLE IRA, plus a catch-up contribution of $3,000 if you’re 50 or over. And your total contributions, if you have another retirement employer plan, maxes out at $18,500 annually.

There are a few other restrictions: If you take out an early withdrawal , before the age of 59 ½ , it has a 10% penalty much like a regular 401(k) and within the first two years of setting up the SIMPLE account it actually has a 25% penalty. (There is a 401(k) version of a SIMPLE plan that does allow for loan withdrawals, but requires more set-up administrative oversight on the front end.)

Defined Benefit Retirement Plan

Another retirement option you’ve probably heard a lot about is the defined benefit plan . Typically, a defined benefit plan or a traditional pension plan pays out a set annual benefits upon retirement, usually based on salary and years of service.

For the self-employed, your defined benefit has to be calculated by an actuary based on the benefit you set, your age, and expected returns. The maximum annual benefit you can set is currently $220,000.

Contributions are tax-deductible and your withdrawals during retirement will be taxed as income. And, if you have employees, then you typically must also offer the plan to them.

Defined benefit plans guarantee you a steady stream of income in retirement and with no set maximum contribution limit, if you’re earning a lot (and going to keep earning a lot through retirement), then they can be a good way to save up money.

These self-employed retirement plans can, however, be complicated and expensive to set up and require ongoing annual administrative work. Not every financial institution even offers defined benefit plans as an option for an individual. You’ll also have to be committed to funding the plan to a certain level each year in order to achieve that defined benefit—and if you have to change or lower the benefit, there can also be fees.

Other Retirement Options for the Self-Employed

While these are the most common self-employed retirement account options and the ones that offer tax benefits for your retirements savings, there are other options you could consider, like a profit-sharing plan if you own your own business. This should all be weighed in balance with your other investments and portfolio, in consideration of your goals and when you plan to retire.

Plus, don’t forget: You also have Social Security funds in retirement, and a financial advisor might be able to help you maximize those simply based on when you start taking Social Security payments, how many dependents you have, and how long you continue working at what salary. Full retirement age for Social Security is considered 67 years old.

The IRS does offer what it calls annual
to check on your retirement account and to go through a checklist of potential issues or fixes. However, you may want some additional human guidance, especially if you have specific questions.

Saving for Retirement with SoFi Invest®

When you’re an entrepreneur or self-employed it can feel like you have to have all the answers, but while you’re an expert in your field, you might not be an expert in retirement planning. That’s when talking to a wealth management advisor can help you figure out what makes the most sense for you.

When you open an invest account with SoFi Invest you’ll benefit from a team of financial advisors who are ready to help you by determining your retirement goals and establishing a plan to help you meet them.

At SoFi, our financial advisors aren’t compensated on commission and are held to a fiduciary standard which means they’re not motivated by commission and will act in your best interest. As a SoFi member you’ll also have access to a variety of other member benefits, including career services and member events.

You’ve worked hard to build your business, let SoFi help you build your retirement fund. Open an account with SoFi Invest today and receive personalized advice from a licensed financial advisor.

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The information and analysis provided through hyperlinks to third party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.
The information provided is not meant to provide investment or financial advice. Investment decisions should be based on an individual’s specific financial needs, goals and risk profile. Advisory services offered through SoFi Wealth, LLC. A registered Investment Advisor. SoFi Securities, LLC, member FINRA / SIPC .
SoFi doesn’t provide tax or legal advice. Consult with a qualified tax advisor or attorney.

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