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4 Ways to Start a Retirement Account as a Self-Employed Freelancer

Self-employed people have just as many ways to save for retirement as those working a 9-5 job. Laura covers the rules, pros, and cons of four easy retirement account options that any freelancer or entrepreneur can use to create a comfortable, happy lifestyle in retirement. 

By
Laura Adams, MBA
9-minute read
Episode #575

Important rules: Anyone with earned income (including business income)—including the self-employed, minors, and non-working spouses who file a joint tax return—can have a Roth IRA.

For 2019, you can contribute up to $6,000, or $7,000 if you’re age 50 or older, as long as you earn that much. You have until the tax filing deadline (including extensions) to make IRA contributions for the previous year.

Pros: A Roth IRA allows you to save for retirement and avoid paying tax on decades of earnings and growth in the account. You get the full tax benefit even if you (or a spouse) participate in a retirement plan at work.

An IRA is the easiest account to start if you’re self-employed or you don’t have much income to invest. If you’re not sure whether to use a traditional or a Roth IRA, you can use both, as long as you don’t exceed the contribution limit. For example, you could contribute $2,000 to a traditional IRA and $4,000 to a Roth IRA in the same year.

Cons: As I previously mentioned, one downside is the relatively low annual contribution limit. A Roth IRA is unique because it’s the only retirement account that imposes limits based on your income and tax filing status. If you make over a certain amount, you may not qualify to contribute. That makes a Roth IRA ideal when you’re just starting out and not making much money.

How to start: There are many places to open a Roth IRA, such as banks, investment firms, and insurance companies. Just like for a traditional account, you can open a Roth IRA online.

While you can’t roll over funds from a traditional workplace retirement account into a Roth IRA, you can roll over from a Roth 401(k) or a Roth 403(b). Since contributions to a Roth IRA aren't deductible, you don’t report them on your tax return.

3. Solo 401(k)

While you’ve probably familiar with a 401(k) offered by some companies, you might not know that the self-employed can have one too. These plans are sometimes called a:

  • One-Participant 401(k)
  • Individual 401(k)
  • Uni-401(k)

Important rules: Anyone who is self-employed without employees other than a spouse can have a solo 401(k). You can make contributions as both an employee of your business and as the owner.  

For 2019, your solo 401(k) contributions as an employee can be 100% of your earned income up to $19,000, or $25,000 if you’re over age 50. As your own employer, you can contribute an additional amount, up to 25% of your net income.

Your maximum annual contribution can be $56,000, or $62,000 if you’re over age 50. This allows you to contribute more to a solo 401(k) than other types of retirement accounts for the self-employed.

Pros: Since a solo 401(k) offers high contributions limits, it’s perfect when you have high self-employment income and no employees. They’re available as a traditional or Roth account, offering pre- or post-tax contributions.

Just like with a Roth IRA, withdrawals of contributions and earnings from a Roth solo 401(k) are completely tax-free. But unlike a Roth IRA, which imposes annual income limits, you can contribute to a Roth solo account no matter how much you earn.

Con: The main downside to a solo 401(k) is that if you plan to hire employees, you’ll have to complete IRS paperwork to convert it into a regular 401(k). These come with more administrative hassles and restrictions than a solo account.

Note that if you also have a regular 401(k) at your day job, the most you can put in both plans for 2019 is $19,000 or $25,000 if you’re age 50 or older. Retirement account limits are set by person, not by plan.

How to start: There are many places to open a traditional or Roth solo 401(k), such as banks, investment firms, and insurance companies.

You can use the worksheets in IRS Publication 560 to calculate your allowable annual 401(k) contributions. Once your account balance reaches $250,000, you’re typically required to file Form 5500-SF.

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About the Author

Laura Adams, MBA

Laura Adams received an MBA from the University of Florida. She's an award-winning personal finance author, speaker, and consumer advocate who is a frequent, trusted source for the national media. Money-Smart Solopreneur: A Personal Finance System for Freelancers, Entrepreneurs, and Side-Hustlers is her newest title. Laura's previous book, Debt-Free Blueprint: How to Get Out of Debt and Build a Financial Life You Love, was an Amazon #1 New Release. Do you have a money question? Call the Money Girl listener line at 302-364-0308. Your question could be featured on the show.