Ask the Classy Frugalist: I’m Self-Employed. What Options Do I Have to Save for Retirement?

For many of us, an employer retirement account is a given … but what if you’re self-employed? This week’s question comes from a reader who is a freelance actor, and her spouse is a freelancer, too. She wants to start saving for retirement early, but she’s not sure what her options are since she doesn’t qualify for an employer-sponsored 401(k) program.

The good news is that there are a lot of great choices. The bad news, of course, is that there are more options to compare. Don’t get lost in the decision-making process. Let’s explore what’s available so you can understand the next steps to take. I’ll start with one option that’s open to everyone — whether you have access to an employer plan or not: an Individual Retirement Account (IRA).

1.     IRA: Just like an employer plan, an IRA is an investment account you can use to save for retirement. For those under age 50, you can contribute up to $5,500 per year. The only catch is that you can’t contribute more than you (or your spouse) earns. For most people this shouldn’t be an issue, but if you’re just starting out as a freelancer it’s a good thing to be aware of. There are two primary options: Traditional and Roth. With a Traditional IRA, you receive a tax deduction today on the money that you contribute, but you have to pay taxes on the money you contributed (and its associated earnings) during retirement. With a Roth IRA, you don’t receive a tax break today, but you can withdraw all of the money (your contributions and what they earn along the way) tax free in retirement. If you are just starting out or are in a lower tax bracket, a Roth IRA can offer a lot of benefits since you’ll likely be in a higher tax bracket when you retire. Find out more about Roth vs. Traditional IRAs in this NerdWallet article.

Ready to take the next step? An IRA can be opened at a brokerage firm, mutual fund company, bank, or even an automated investing service (i.e. robo-advisor). This U.S. News article does a great job of walking through different investment choices, as does this NerdWallet article. The most important step in this process, especially if you are just starting out, is to pay close attention to the associated costs and fees. To make sure these savings are working as hard as they can for you, it’s important to minimize the amount taken off the top by the investment provider. Personally, my family uses Vanguard because they have low fees and lots of investment choices. However, I’m really intrigued by companies like Betterment who make it easy for people to figure out how to invest their funds.

2.     Solo 401(k): If you are self-employed or own your own business with no employees (except a spouse), this might be a good option for you. This plan works similar to a traditional employer 401(k) plan. You can make both employer and employee contributions following the limits set out by the IRS. However, if you have an employer 401(k) in addition to your solo 401(k), remember that the IRS limits apply per person, not per plan. The option is great for those who want to put away both employer and employee contributions and have the freedom to change these contributions each year. There are also Roth 401(k) options.

Ready to take the next step? Unlike an IRA, a solo 401(k) requires a little more work. You’ll need an Employer Identification Number and have to fill out some plan and account paperwork. These accounts are available from many of the same investment institutions that offer IRAs. Here’s a list of the 6 best solo 401(k) providers from FitSmallBusiness.

3.     SEP (Simplified Employee Pension) IRA: This account is designed for those who are self-employed, or those who own a small business, with no or few employees. This plan, like the solo 401(k), is also subject to its own IRS contribution limits. On the plus side, you can start a SEP IRA with less paperwork than a solo 401(k). It also gives you quite a bit of flexibility because you don’t have to contribute to the account until you do your tax return. So, if your business does better than you expect you can contribute more, or less if you didn’t do as well. Another benefit: If you have a side hustle, you can set up this plan for your business and still participate in your employer’s retirement plan. On the downside, as the employer, you do have to contribute the same amount for each eligible employee — including yourself — and you only have the option of contributing pretax. There’s no Roth SEP IRA option.

Ready to take the next step? The process is very similar to opening a Traditional or Roth IRA, there’s just a little more paperwork involved. Have less than 100 employees and are looking for a way to offer a savings match to your employees? The SIMPLE IRA might be a better fit for your needs — check out this article by The Balance to learn more.

I’ve laid out three options here but there are certainly more you can check into. I really appreciated this NerdWallet article on Retirement Plan Options for the Self-Employed, which does a great job of breaking down your choices, as well as this article by Forbes.

Have tips for getting started saving for retirement when you’re self-employed? Leave a comment below.

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