Retirement Savings: What's a Self-Employed Person To Do?

BY: Daniel M. Savage


With traditional pension plans all but gone, many workers have been left to rely on a 401(k) plan as their primary source of income in retirement. There’s just one problem with that: Multiple studies indicate that approximately 40 million Americans do not have a workplace retirement plan.

Self-employed individuals must also depend on themselves for retirement savings solutions. Fortunately, if you’re in that category, you have several options at your disposal. Let’s take a closer look at four.

1. Traditional Individual Retirement Account (IRA). The Employee Retirement Income Security Act of 1974 allows you contribute money to a tax-deferred account held at an investment firm or a bank. Contribution limits for 2019 and 2020 are $6,000 annually if you’re under 50. If you’re 50 and older, a $1,000 catch-up provision is available, thereby raising the total to $7,000. Here are a few important points to remember:

  • Investment options include mutual funds, stocks, bonds, exchange-traded funds, and bank deposit products.
  • By contributing the maximum allowable amount and starting early, one can accumulate a substantial retirement benefit. For example, a single 30-year-old can amass more than $1 million by contributing the maximum amount and earning 7% over 40 years.
  • Even if your spouse has access to an employer retirement plan, you can contribute to an IRA if you have earned income.
  • You may not contribute more than you earn.
  • You may be able to deduct your IRA contributions. (Please feel free to contact a Wealth Manager for more information on deductibility.)

2. Roth IRA. For younger self-employed and other individuals who can benefit from many years of tax-free growth, the Roth IRA may be a better option. If you’re 59 ½ or older and have had your Roth IRA for at least five years, all withdrawals are tax-free.

However, there are income limits on Roth contributions. For example, a married couple that files jointly must have an adjusted gross income of less than $196,000 to contribute the $6,000 maximum (or $7,000, for those 50 and older). Again, please contact a Wealth Manager for more information on contribution limits.

3. Solo 401(k). This can be a great option for those who are self-employed, because one may contribute both as employee and employer; moreover, the contribution limits are far greater than for a traditional or Roth IRA. If you’re younger than 50, the 2020 limit is $57,000, and you can add a $6,500 catch-up contribution if you’re 50 and above.

4. Simplified Employee Pension (SEP) or SEP IRA. This approach may merit consideration if you’re planning to hire a small group of employees. Individual SEP IRAs are the funding vehicles for employee accounts, but only employer contributions are permissible.

Contribution limits are very generous. With an SEP, in 2020, an employer may contribute up to 25% of an employee’s gross annual salary or $57,000, whichever is less. Self-employed business owners can contribute up to 20% of their net adjusted self-employment income, provided the contributions do not exceed $57,000.

Best of all, employers may change the contribution from one year to the next, in response to evolving business conditions. In other words, contribution levels are at the discretion of the employer.

Conclusion: Even if a traditional 401(k) or similar retirement plan doesn’t fit your circumstances, you don’t need to be one of the nearly 40 million Americans without access to a good retirement plan. There are excellent alternatives, including those mentioned above. Each is affordable, simple to administer, provides for a wide range of investment options, and can be funded at levels that are appropriate for your financial circumstances…even if they change from year to year.

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