Are You Self-Employed? Here Is the Best Way to Save for Retirement

This post may contain affiliate links which may compensate us based on your interaction. Please read the disclosures for more information.

If you’re self-employed, saving for retirement is up to you. But there are some great options. Read on for a breakdown. [[{“value”:”

One of the biggest drawbacks of being self-employed is that you are on your own when it comes to retirement savings. You don’t have the luxury of an employer-sponsored retirement plan, or the matching contributions that are often offered with one.

However, there are some excellent options for retirement savings if you are self-employed. Here’s a rundown of the three main types of accounts self-employed individuals can use to save and invest.

SIMPLE IRA

SIMPLE IRAs (stands for Savings Incentive Match Plan for Employees) are retirement plans designed for businesses with 100 or fewer employees. And self-employed individuals are certainly eligible.

Because you are considered both the employee and employer, you can make both types of contributions to a SIMPLE IRA. As an employee, you can contribute as much as $16,000 or 100% of your earnings, whichever is less, and there’s an additional $3,500 catch-up contribution allowed for those aged 50 and older.

In addition, as the employer, you can match your employee contributions dollar for dollar, up to 3% of your self-employment income.

SEP IRA

A SEP IRA (the SEP stands for Simplified Employee Pension) is another option that is designed for small businesses and self-employed individuals.

There are a couple of key differences from the SIMPLE IRA. First, all SEP IRA contributions are considered to be from the employer, not the employee. Second, the contribution limit is much higher — SEP IRA contributions in 2024 are limited to 25% of your income or $69,000, whichever is lower.

Solo 401(k)

A Solo 401(k), also known as a one-person 401(k), results in the highest contribution limit for many individuals. It has the same $69,000 overall contribution limit as the SEP IRA with two big differences:

First, $23,000 of it is considered an employee contribution, and can be made as long as your income exceeds your contribution. The rest of the limit (up to another $46,000) is considered an employer contribution and can be as high as 25% of compensation.Second, because there are employee contributions, Solo 401(k)s allow catch-up contributions for participants aged 50 and over. For 2024, the catch-up contribution adds $7,500 to the maximum.

Plenty of options

It’s also worth noting that in addition to these three types of accounts, self-employed individuals are eligible to use a traditional or Roth IRA to save. And in many cases, you can use and contribute to one of these in addition to the self-employed retirement accounts discussed earlier. And chances are that you’ll be able to find one of our top-rated brokers that offers the account that best meets your needs.

Additionally, thanks to the SECURE Act 2.0, there are now Roth versions of all three self-employment retirement account types. If you’d prefer to maximize your tax break now, you can open a traditional (pre-tax) version of any of them, but if you’d prefer to enjoy tax-free income after you retire, a Roth account is certainly an option.

Once you’ve deposited money into any of these account types, you can invest it in virtually any stocks, bonds, ETFs, or mutual funds you want. Depending on your brokerage, you may be able to put your investments on autopilot within your account by enrolling in a robo-advisor service.

Which is best for you?

There is no perfect answer for everyone. The best choice for you depends on how much you plan to set aside for retirement, how much self-employment income you have, and how much account maintenance you’d like to do. But one thing is for certain — there are some great options that can help you save and invest for a comfortable retirement and save money on your taxes in the meantime.

Alert: our top-rated cash back card now has 0% intro APR until 2025

This credit card is not just good – it’s so exceptional that our experts use it personally. It features a lengthy 0% intro APR period, a cash back rate of up to 5%, and all somehow for no annual fee!

Click here to read our full review for free and apply in just 2 minutes.

We’re firm believers in the Golden Rule, which is why editorial opinions are ours alone and have not been previously reviewed, approved, or endorsed by included advertisers.
The Ascent does not cover all offers on the market. Editorial content from The Ascent is separate from The Motley Fool editorial content and is created by a different analyst team.The Motley Fool has a disclosure policy.

“}]] Read More