Self Employment Retirement Options

Self employment doesn’t mean you’re excluded from participating in tax beneficial retirement savings plans. There are plenty of options available for you as well.

Some of the most common choices are the SEP IRA, Simple IRA, Individual 401k and the ever popular Roth IRA. These plans offer a lot of the same tax benefits as plans offered by traditional employers giving you an equal opportunity for a comfortable retirement.


The SEP IRA (which stands for Simplified Employee Pension) is a type of traditional IRA. Anyone who owns a business with one or more employees is qualified to open a SEP IRA. This is also an option if your self employment includes freelance income.

Like the traditional version, contributions made to a SEP are tax deductible. And they grow tax free until withdrawn. The same basic rules apply regarding early withdrawal penalties as well.

However, unlike traditional IRAs, SEP contributions are made by the company and not the individual (unless you’re freelancing). When the contributions are made, they go into a traditional IRA in each employee’s name. The contribution limits are also higher with a SEP than the traditional allowing you to build your retirement account quicker.

There are some eligibility requirements such as an age limit and a specified amount of time each individual has to be employed by the company. Also as an employer you are not required to make contributions every year. However, if you choose to make contributions, you will have to include all eligible employees.

These accounts are easy to open and are available at most banks, mutual fund companies and brokerage firms. The fees are relatively low and the formulas for contributions are simple – a capped percentage of net income for each employee.

They are perfect for self employment scenarios where the company is small (one or two employees) and they give the flexibility to contribute or not based on company profitability.

Simple IRA

The Simple IRA (which stands for Savings Incentive Match Plan for Employees) is another type of traditional IRA geared toward self employment. The contributions are tax deductible and tax deferred with the same early withdrawal penalties.

With this plan, the employer makes contributions into a traditional IRA in each employee’s name. At first glance this plan looks a lot like the SEP. However they differ in a few important ways.

First of all, employees are allowed to make contributions to their plan although they are not required to. And while Simple IRAs have higher contribution limits than traditional or Roth IRAs, their limits are considerably lower than the SEP IRA.

There are also limits as to the maximum amount of employees the company can have and a minimum limit on how much each employee has to make. A company is also not allowed to have another type of retirement plan in place besides the Simple IRA.

These plans are perfect for self employment scenarios where you anticipate the company may be adding employees in the future. It’s much easier to add employees to a Simple IRA plan than a SEP. They’re also much easier to set up and administer than some of the other choices available.

These accounts can be opened at most banks, mutual fund companies or brokerage firms and are a good option for a growing company.

Individual 401k

An individual 401k or solo 401k as it is sometimes referred operates much like an employer’s 401k plan. However these are structured for self employment scenarios where there is a sole proprietor with no employees. Although a spouse can contribute if they receive income from the business.

They come in two varieties – traditional and Roth. With the traditional 401k, all contributions are made with pre-tax dollars. It then grows tax-deferred until withdrawn.

The Roth 401k works the opposite. You make contributions with after tax dollars or gross pay. However when you withdraw the funds they aren’t taxed. The reason this option appeals to some is they worry that by the time they withdraw the money, taxes will be significantly higher. They feel they will save by paying the taxes now.

Unlike other self employment retirement options, the 401k, whether traditional or Roth, allows you to borrow against your savings. Not all providers offer this though, so if it’s important for you to have this option, always ask before opening the account. As a side note, if you have any other choice NEVER borrow from your retirement.

These plans allow you to save a lot of money each year as well. Even though they have contribution limits, you’re allowed to save as both an employer and employee raising those limits higher than most self employment plans.

They also allow you the option of whether or not to contribute to the plan each year based on company performance.

These plans are typically more difficult to set up and more expensive to manage than some of the other options. However, for some the benefits far outweigh the cost and hassle.

Your best bet would be to go to a large company such as Schwab to help you with this. A large investment firm can offer you the widest range of investment choices as well as their vast experience.

Roth IRA

The Roth IRA is one of the simplest and most effective ways to save money for retirement. While the other options presented above are specifically geared toward self employment, the Roth IRA is available to almost everyone. It can even be a supplement in some cases to other retirement plans.

The main difference in a traditional and Roth IRA is the way the taxes are paid. With a traditional IRA, taxes are paid at withdrawal. All contributions are made with pre-tax dollars and the account grows tax free.

Because you haven’t been taxed on this money, you are required to begin withdrawing it by a certain age. This isn’t the case with a Roth IRA.

A Roth IRA is funded by after tax dollars or gross pay. Since you've already paid the taxes, you can keep the money in the account indefinitely and even pass it on to your heirs if you choose to.

There’s also no special tax reporting for the Roth IRA since you’ve paid taxes upfront. Your money grows tax free and won’t be taxed again at retirement so you know exactly what you’ll receive.

As you can see self employment offers plenty of opportunities and avenues to save for retirement. These are just a few of the options available to you. Speak with a financial advisor, CPA or trusted banker if you need additional help deciding which account is right for your situation.

Then set up your account and get started saving for a brighter future.

From Self Employment to Investing Money