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

Account #2: Roth IRA

A Roth IRA is subject to all of the major rules that apply to a traditional IRA—except when it comes to taxes and withdrawals. Your contributions to a Roth IRA are taxed up front, but your withdrawals during retirement are completely tax free.

And speaking of withdrawals, you don’t have to take any money out of a Roth IRA as long as you live. With a traditional IRA, on the other hand, you’re required to start drawing down the account after you reach age 70½.

Additionally, you can withdraw contributions to a Roth IRA before retirement without triggering tax or penalties. However, this doesn’t apply to earnings in the account, which would be subject to tax and the 10% early withdrawal penalty if you’re younger than age 59½.

Who can use it: Anyone with earned income, including the self-employed and non-working spouses, qualifies for a Roth IRA.

Pro: 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.

Con: A Roth IRA has contribution limits based on your income and tax filing status. If you make over a certain amount, you may not qualify to contribute. However, in 5 Steps to Create a Backdoor IRA, I explain how you may still be able to convert money into a Roth IRA even if you do earn more than the limit.

2015 Maximum Contribution: You can contribute up to $5,500, or $6,500 if you’re age 50 or older. This is the total limit for all IRAs. For example, you could contribute $2,000 to a traditional IRA and $3,500 to a Roth IRA in the same year, but not $5,500 to both IRAs.

See also: 7 Pros and Cons of Investing in a Retirement Plan at Work

Account #3: Solo 401k

While you’ve probably heard of a 401k plan offered by big companies, you might not know that you can also have one when you work for yourself.  They go by different names, such as a solo 401k, an individual 401k, or a one-participant 401k. You can have a traditional or a Roth solo 401k.

As both the employer and the employee in your business, you can make both kinds of contributions to a solo account. That allows to you contribute more with a solo 401k than any other type of retirement account.

Who can use it: Anyone who is self-employed with no employees other than a spouse.

Pro: Since a solo 401k offers high contributions limits, it’s perfect when you have high self-employment income. Unlike a Roth IRA that imposes income limits, you can contribute to a Roth solo 401k no matter how much you earn.

Con: The only downside to a solo 401k is that if your long-term business plan is to hire additional staff, you’d have to complete IRS paperwork to convert it into a regular 401k.

2015 Maximum Contribution: On the employee side of a solo 401k, you can contribute as much as 100% of your salary up to $18,000 or up to $24,000 if you’re 50 or older.

As the employer, you can contribute up to 25% of your net earnings, as long as your total contributions (including your salary deferrals) don’t exceed $53,000, or $59,000 if you’re age 50 or older.

Be aware that if your business is a side-hustle—like doing freelance writing or weekend photography—and you also participate in a 401k at a second company, the total employee contribution you can make to both plans is $18,000 or $24,000 if you’re age 50 or older.

You can also have a solo 401k in addition to a traditional IRA or a Roth IRA. However, depending on your income and tax filing status some or all of your contributions to a traditional IRA may not be tax deductible. 


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.