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

See also: Should You Contribute to Both a 401k and an IRA?

One of the easiest and least expensive retirement plans to administer is the SEP-IRA, which stands for Simplified Employee Pension. It’s an option for any size business or those who are self-employed with no employees.

Account #4: SEP-IRA

But what if you’re a small business with employees? One of the easiest and least expensive retirement plans to administer is the SEP-IRA, which stands for Simplified Employee Pension. It’s an option for any size business or those who are self-employed with no employees.

With a SEP-IRA, contributions can only come from an employer. Employees can never contribute their own money.

So, as the business owner, you choose the amount to contribute each year. However, you must give all employees the same percentage.

For example, let’s say you have a small web design business with one employee named Jack. If you choose to contribute 15% of your pay to your own SEP-IRA, you’d also have to contribute 15% of Jack’s pay to his 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 Jack leaves your employment, he can take his retirement money with him.

Just like with a traditional IRA, when you take money out of a SEP-IRA before age 59½, you’re subject to income tax plus an additional 10% early withdrawal penalty.

Who can use it: Anyone who is self-employed without or with employees, no matter if you’re set up as a sole proprietor, partnership, or a corporation.

Pro: 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.

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

2015 Maximum Contribution: 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 $53,000.

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 401k or 403b 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 $53,000.

Account #5: SIMPLE IRA

A SIMPLE IRA is another retirement account option for any size business. It’s an acronym for Savings Incentive Match Plan for Employees.

Unlike with a SEP-IRA, employees can put their own money in a SIMPLE IRA through payroll deductions. In addition, the employer must contribute to their workers’ accounts each year as either matching funds or as nonelective contributions.

Here’s how the matching option works: The employer must match what the employee contributes on a dollar-for-dollar basis up to 3% of their compensation.

The nonelective option means that the employer has to pay up regardless of whether the employee contributes any of his or her own money. The employer is required to give the employee 2% of their compensation up to a limit each year.

For instance, if you make $50,000, the employer would be obligated to kick in 2% or $1,000 ($50,000 x 2%), regardless of the amount you contributed. Again, the employer gets to choose between these 2 options—they never have to pay both matching and nonelective contributions.


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.