Self Employed Retirement Plans: Here Are Your Options



self employed retirement plans

There are all types of self-employment and all types of ways to set aside money for retirement.

But often, those working in self employed jobs don’t set aside funds for retirement. They think they don’t have the time or the money.

Neither is true. You can start a retirement account with any amount of money – the most important thing is to start. And we’ll cover the nuts and bolts of the various options for a self employed individual.



What is a Self Employed Retirement Plan?

People with employers typically have retirement plans such as an IRA or 401 k. Self employed people can have the same type of plans, and they are easy to start.

Funding retirement for self employed individuals isn’t something to be feared, or avoided. The sooner you start, the sooner those accounts will begin to grow.

How to Choose the Best Self Employed Retirement Savings Option

As a self-employed person, you’re also a business owner. That gives you options regarding contribution limits for certain plans. We’ll cover the details of the retirement plans later. In the meantime, here are things to keep in mind as you learn more:



  1. Before Tax? – If you choose to contribute earnings from self employment before those earnings are taxed, the amount you contribute will be subtracted from your gross income (called modified adjusted gross income) when you file taxes. When you withdraw the money, it will be taxed.
  2. After tax? – If you choose to contribute money that has been taxed, you can later make tax free withdrawals.
  3. Amount of contribution – If you choose an IRA, your annual contribution limit is set at $6,000 for a single person (or $7,000 the first year you open the IRA as a catch up contribution). If your earnings from self employment are high, you may want to choose retirement savings with higher contribution limits, such as a 401 k or Keogh.
  4. Your age – If you’re youngish, you may go with an IRA or 401 k plus a Health savings account. You can contribute $3,650 to an HSA (in 2022), and you can withdraw that money tax free as long as it is used to pay medical expenses. If you make a lot of money, or are oldish, you may choose to quickly build retirement savings with an account such as a Keogh. With a Keogh you set the schedule for the timing and amount of contributions.

8 Retirement Accounts for Self Employed

Here are the details for self employed retirement planning.

1. Self Employed 401 k

As a self employed person, you’re both employee and employer. Although it’s a solo 401 k, you can make contributions as both employee and employer contributions. That makes the solo 401 k a top choice in plans for retirement for self employed individuals.

Contribution Limit: The employee contributions to the 401 k can be up to $19,500 (plus another $6,500 if you’re more than 50 years old). The employer’s contribution can bring that solo 401 k annual contribution up to a $55,000 total.

Tax Benefits: Contributions to a solo 401 k are on a pre tax basis and are deducted from your gross income.



2. Self Employed IRA (Simplified Employee Pension or SEP IRA)

The SEP IRA is structured differently from the traditional (or Simple IRA) and Roth IRAs.

To start a SEP IRA, you must earn less than $122,000 as a single person or $193,000 married.

Contribution Limit: The contribution limits are up to 25% of earnings, based on the standard income limits.

Tax Benefits: Contributions are pre tax dollars and deducted from gross income.



3. IRAs

For a simple IRA retirement account there are two kinds, traditional (Simple IRA) or Roth IRA. Either is easy to start and often offered by an investment company or financial institution.

With the Roth IRA contributions are taxed before they are contributed and part of net self employment earnings. That means that the Roth IRA monies are not taxed when withdrawn.

With a traditional IRA, contributions are pre tax dollars and subtracted from gross income. When withdrawn from the traditional ira retirement account, the monies are taxed.

Contribution Limit: $6,000 a year ($7000 the first year as a catch up contribtion) annually. If you want to contribute more, then a 401 k may be a better choice ($19,500).



Tax Benefits: The pretax contribution for a traditional IRA is pre tax and deducted from gross income taxes. With the Roth IRA, contributions are after tax dollars. You won’t pay taxes on the Roth IRA monies when you withdraw them.

4. Self Employed Social Security

Money goes into this account via self employment taxes. This is in additional to income tax. Self employment taxes are 15.3%, with 12.4% for social security and 2.9% for medicare.

Contribution Limit: If you earn more than $400 a year, you must pay self employment tax. The amount you contribute will be based on your net earnings. Half of the social security tax is generally tax deductible, since “normally” half would be paid by an employer contribution.

5. Profit Sharing Plan

A profit sharing plan is also called a Keogh plan. As an employer, you make contributions.



The profit sharing or Keogh plan is like a pension, but you as employee can figure out what you’d like to receive yearly as part of your retirement plans. Based on that goal, you create a schedule of contributions.

As an employer, you can use a Keogh plan to make contributions to employees’ accounts. If you do so, that amount is tax deductible from your business’s taxable income.

Contribution Limit: The maximum annual benefit is a contribution up to $225,000.

Tax Treatment: The amount you contribute to your account is on a tax deferred basis. The amount you contribute to employees as a business owner is deducted from the business’s taxable income.



6. Money Purchase Plan

Money purchase plans are also known as defined benefit plans. A defined benefit plan is a top choice if you’ve started saving late and want to make a catch up contribution to a plan.

You set up the plan with a fixed amount for the annual contribution limit. The annual contribution is tax deferred growth.

As an employer you can offer a money purchase plan as part of eligible employee’s compensation, depositing the monies into their individual retirement accounts. There is no annual compensation limit to these defined contribution plans – you set the amount.

Contribution Limit: The limit is set by the employer.



Tax Benefits: Small businesses owners can offer a Money Purchase Plan as a perk. If an employee leaves the company the money can be rolled over into other retirement plans, received as a lump sum or used to purchase an annuity.

7. Savings Incentive Match Plan for Employees

This is also called by its initials, SIMPLE. The SIMPLE Plan can be established by one person or for employees, as a workplace retirement plan for a small business with fewer than 100 employees.

Either way, the SIMPLE retirement plan has a tax advantage for business owners. Each employee who earns $5,000 or more can have an individual retirement account which the employer funds.

Contribution Limit: Up to 3% of annual income is the maximum employer contribution.



Tax Benefits: Small business owners who offer this to employees get a tax deduction based on the amount the owner contributes. And it’s a nice perk to offer as part of employee compensation.

8. Health Savings Account

It’s important to realize this requirement for starting an HSA – your health insurance plan must have a deductible of $1,350 or higher ($2,700 for family plans).

If you’ve maxed out your annual contributions to traditional and roth iras, sep iras or 401 ks, an HSA has tax advantages. You are contributing pre tax dollars, which are subtracted from your gross income.

Contribution Limit: $3,650 for a single person, $7,300 for families (figures for 2022).



Tax Benefits: You can withdraw the HSA money tax free as long as the money is used for medical expenses (health, vision and/or dental). After you are 65, you can use the money for any purpose, but it will then be taxed as part at the rate of your ordinary income.

How to Open a Self Employed Retirement Plan

Your first step is to choose the plan that fits. You have to consider things like how much you can afford to contribute, given your personal finance situation and goals. If you want to contribute a more significant amount than the $6,000 IRA, you need a plan where you can make additional catch up contributions.

One of the best sources for learning more before you make that decision is the IRS.

Managing Your Retirement Funds

Some plans are simple to start, but to get the best value from your funds you should consult a financial advisor.

With a 401 k, you can start making withdrawals at age 59 1/2. With SEP IRAs, Roth and traditional IRAs, you must make required minimum distributions at age 70 1/2 or 72 (depending on your date of birth).

You need a plan for how you’ll use that money after withdrawals.

What is the best retirement plan for self employed?

A traditional or roth ira is an easy way to get started. The first year, you can make an additional catch up contribution of $1,000 in addition to the annual maximum $6,000. Contributions will be deducted from your gross income, which will reduce the taxes you pay on your net earnings from self employment.

With the SEP IRA or self employed 401 k, the annual self employed employee contribution can be higher.

The HSA makes great sense. Some of the most affordable health care plans are affordable because they come with high deductibles.

How much can a self employed person put away for retirement?

There are no limits. The amount you can save depends on the type of retirement plan product you can afford, and choose.

Do self employed pay social security?

Yes. Social security is paid as part of self-employment tax. The self employment tax is 15.3%, with 12.4% for social security and 2.9% for medicare.

Is an IRA better than a 401k?

Both are funded with pretax dollars and taxed at withdrawal. The contribution limit for an IRA is $6,000. A 401 k can be “double funded” by you as employer and employee, up to $55,000 total annually. If you can afford it, you can save more faster with a 401k. Also, you can have both types at the same time.

You can have more than one IRA, but your total annual contribution to all your IRA accounts is limited to $6,000.

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Lisa Price Lisa Price is a freelance writer living in Barnesville, Pennsylvania. She has a B.A. in English with a minor in journalism from Shippensburg State College (Pennsylvania). She has worked as a trucking company dock supervisor, newspaper circulation district manager, radio station commercial writer, assistant manager of a veterinary pharmaceutical warehouse and newspaper reporter.

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