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. 

Laura Adams, MBA
9-minute read
Episode #575


But what if you’re a small business with employees or plan to hire staff someday? One of the easiest and least expensive retirement plans for entrepreneurs to administer is a SEP-IRA, which stands for Simplified Employee Pension. It’s an option for any size business or those who are self-employed with or without employees.

One of the easiest and least expensive retirement plans for entrepreneurs to administer is a SEP-IRA, which stands for Simplified Employee Pension.

With a SEP-IRA, contributions can only come from an employer. Employees can never contribute their own money. As the business owner, you choose the amount to contribute each year. However, you must give all employees the same percentage of income that you give yourself.

For example, let’s say you have a consulting business with one employee named Susan. If you choose to contribute 15% of your pay to your own SEP-IRA, you’d also have to contribute 15% of Susan’s pay to her SEP-IRA.

But if you have a bad year with little profit, you can choose not to make any contributions. Employees are always vested in their SEP-IRA account, which means if Susan quits, she can take her retirement money with her.

Important rules: For 2019, you can make SEP-IRA contributions for each of your employees (including yourself) up to 25% of each employee’s compensation for a maximum amount of $56,000.

You can also have a SEP-IRA in addition to other retirement accounts, such as a traditional IRA or Roth IRA. You can even have a 401(k) or 403(b) with another employer. However, the total amount you can contribute to an employer plan plus your SEP-IRA is limited to 100% of your compensation up to $56,000.

Just like with a traditional IRA, contributions to a SEP-IRA are tax deductible. You defer all tax until you take distributions in retirement. However, any early withdrawals before age 59½ are subject to income tax plus an additional 10% penalty.

Pros: The major advantage of a SEP-IRA is the flexibility to make contributions in years when your business cash flow allows it, and to opt out when money is tight. It comes with no administrative hassles or annual reporting to the IRS. Like the solo 401(k), a SEP-IRA gives you high contribution limits.

Cons: The main downside to a SEP-IRA is that when you have employees, you must contribute an equal percentage of income to their accounts. Also, there isn’t a Roth option or a “catch-up” provision that allows you to contribute more when you’re over age 50.

How to start: You can open a SEP-IRA at any financial institution or online investing company where you would get a traditional or Roth IRA, such as Betterment or TD Ameritrade. You must complete Form 5305-SEP, a simple one-page form.

Once you’ve decided to use one or more of these retirement accounts, the investment firm you choose will walk you through the process of opening and funding it. They’ll inform you of any paperwork you need to file with the IRS.

So, if you haven’t started, make a goal to begin making regular retirement contributions this year. Making sure that you have a secure financial future is part of being a successful business owner or entrepreneur.

Ready to get out of debt and create a clear financial plan? Check out Laura’s best-selling debt course, Get Out of Debt Fast—A Proven Plan to Stay Debt-Free Forever. It’s available at 50% off for a limited time.

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Self-Employed Woman image courtesy of Shutterstock


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.