5 Retirement Options When You’re Self-Employed

Even if you don't work for a big company, you can still use a retirement account to cut taxes and save more for the future. Laura answers a reader question and covers five of the best retirement accounts to use when you're a freelancer, work part time, are self-employed, or work for a small company that doesn't offer a retirement plan.

Laura Adams, MBA
10-minute read
Episode #422

If you’re self-employed, a freelancer, or work part time, investing for retirement can seem challenging. A Money Girl reader named Shawnna is worried about her future. She says:

“I run a daycare from my home and only make enough to pay bills. I plan to continue my daycare for the next 7 or 8 years until my youngest child is half way through college, when I’ll be in my late 40s. Will that be too late to start saving for retirement—and what’s the best way to invest when you’re self-employed?”

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Just because Shawnna doesn’t have a traditional day job with a 401k doesn’t mean that she doesn’t have great options to save for the future.

In this post, I’ll cover five of the best retirement accounts to consider when you’re self-employed. Using them could make the difference between having a comfortable, happy lifestyle in retirement—or just scraping by.

Free Resource: Laura's Recommended Tools—over 40 of the best ways to earn more, save more, and accomplish more with your money!

What Is a Retirement Account?

If you’re a regular Money Girl reader or podcast listener, you know that I love retirement accounts. I recommend them because they come with fantastic tax breaks that save huge amounts of money. But they’re all a little different, so I want to make you comfortable with the basics of some of the most popular types.

A common mistake that many people make is thinking that a retirement account itself is an investment. That’s not the case. It’s a special financial "bucket" where you hold investments or cash that get special tax treatment.

Once you contribute money to a retirement account you might choose to invest it in vehicles like stocks, bonds, mutual funds, or exchange-traded funds. Or you can even keep it in a money market fund or certificate of deposit (CD) within a retirement account.

Some of the most common retirement account rules include having to pay a 10% penalty if you take early withdrawals before reaching age 59½ and limits on the amount you can contribute each year.

Depending on your work and financial situation, you may qualify for several different types of retirement accounts all at once. The more accounts you contribute to, the bigger the nest egg you can accumulate for retirement.

Free Resource: Retirement Account Comparison Chart - handy one-page PDF download showing retirement account rules and best places to get them!

Here are five types of retirement accounts you should be familiar with when you work for yourself or don't have a retirement plan at work:

Account #1: Traditional IRA

An IRA is short for Individual Retirement Arrangement, which means it’s a plan for individuals only. You can’t own it with another person, not even a spouse. You manage every aspect of an IRA, such as opening the account, sending contributions, and deciding how to allocate your money.

With any type of “traditional” retirement account, your contributions are tax-deductible. For instance, if you earn $50,000 and contribute $5,000 to a traditional IRA, you’re taxed on $45,000 of income only—not on $50,000.

Plus, all investment gains in a traditional IRA are never taxed until you take a distribution. On the other hand, investment gains in a regular, taxable brokerage account get taxed every year.

Who can use it: Anyone with earned income under the age of 70½, including the self-employed and minors who have jobs. Even non-working spouses who file taxes jointly with a working spouse qualify for a spousal traditional IRA.

Pro: A traditional IRA allows you to save for retirement and cut your taxes in the current year.

Con: If you (or a spouse) also participate in a workplace retirement plan—like a 401k or 403b—some or all of your contributions to a traditional IRA may not be tax deductible. Another negative is that it has a low annual contribution limit compared to other retirement options for the self-employed.

2015 Maximum Contribution: You can contribute up to $5,500, or $6,500 if you’re age 50 or older, to an IRA, as long as you have that much earned income.

See also: 10 IRA Facts Everyone Should Know


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.