How to Save for Retirement When You’re Self-Employed

When you own a small business, you may find that retirement planning is last on your to-do list. But getting started isn’t as hard it seems. Here, we outline the most common self-employment retirement options, who should use them, what you can contribute, and how to set them up. One-Participant 401(k) Plan This plan, typically called a Solo 401(k), is similar to a regular 401(k). However, with the Solo 401(k), the participant is both employer and employee, and he or she can contribute up to the regular employee contribution limit plus 25% of the business’s net earnings. You can also set it up as a Roth 401(k) and make non-deductible contributions now and take tax-free withdrawals after retirement.

Who: Self-employed people who have no employees (or only employ their spouse) Setup: Setup requires completing paperwork with investment companies that offer Solo 401(k)s. Be sure to research plan and investment fees. Contribution Limits: In 2015, you can contribute up to $18,000 as an employee plus up to 25% of compensation as an employer, as long as your total contribution does not top $53,000. If you are 50 or older, you can ‘catch up’ with an additional $6,000 ($59,000 total). Note that if you are also participating in another employer’s 401(k), these limits apply per person, not per plan. (See IRS guidelines.) Dates to Know: You must set up the account by by Dec. 31, but you can contribute until April 15 of the following year. 40% of small-business owners aren’t saving at all, while more than 80% say that when times get tough, retirement savings are the first thing they trim.¹ SEP (Simplified Employee Pension) IRA The SEP IRA is another excellent option. With a SEP, the business sets up an IRA for each employee. Only the employer can contribute, and the contribution rate must be the same for each qualifying employee. Who: Self-employed or small-business owners who do not qualify for a Solo 401(k), or who have employees and are looking for a low-cost retirement plan for their company.

Setup: Open a Roth or traditional IRA with a low-cost provider (bank or financial institution). Contribution Limits: Maximum of $5,500 per year to a traditional or Roth IRA, or $6,500 if you’re age 50 or older; Roth contributions may be limited by income. Dates to Know: You have up until April 15 to contribute to an IRA for the preceding year. You can open these at any time. How to Choose Which Retirement Plan Company should you use? That depends on the nature and size of your small business (with or without employees) and your own age and plans.Retirement Plan Company

 Here’s the scenario for an entrepreneur (age 30) with no other employees and who is classified as a single owner corporation. The business nets $100,000 in  Based on this chart, you might be wondering why anyone would do anything but the Solo 401(k).  Here is why: First, setting up an individual 401(k) typically requires more advance planning and paperwork than opening a SEP or SIMPLE IRA (either can usually be done online in just a few minutes). In addition, individual 401(k) plans require you to file Form 5500-EZ with the IRS every year once the plan reaches $250,000 in assets. And of course, with the solo 401(k) you have to be your own company with no employees.  And remember, if your circumstances change, you may be able to roll over your Solo 401(k) plan or consolidate your IRAs into a more appropriate retirement savings account.

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