Retirement Savings Strategies for the Self-Employed

4 Retirement Plan Options for Self Employed - MBO Partners

According to a 2012 study by Ameritrade, 10 million Americans are self-employed, yet 70% of them don’t save for retirement regularly, and 28% don’t save at all. These business owners often focus on growing their businesses but neglect planning for their retirement.

Being self-employed involves juggling numerous financial responsibilities, including making money, paying personal bills, handling self-employment taxes, and growing the business. As a result, retirement savings often take a back seat, with many thinking they’ll deal with it once their business is more secure.

However, it’s crucial to start saving for retirement as early as possible to benefit from compounding interest, which helps your money grow over time. Additionally, retirement contributions can be tax-deductible, providing a valuable tax benefit.


If you’re unsure where to start with retirement savings, here are three popular options for the self-employed:

SEP IRA: The Simplified Employee Pension IRA is available to all self-employed individuals, including small business owners and freelancers. In 2015, you could contribute up to 25% of your net income or $53,000, whichever is less. This option allows higher contributions than a traditional IRA, with the same tax benefits.

Solo 401(k): Designed for businesses that only employ the owner and their spouse, the Solo 401(k) allows contributions as both employer and employee. In 2015, you could contribute the employee limit of $18,000 plus 25% of the business’s net earnings. It also includes a $6,000 catch-up contribution for those over 50 and allows personal loans up to $50,000 or 50% of the account value.

Traditional or Roth IRA: These accounts are open to all individuals, regardless of employment status. As of 2015, you could contribute $5,500 annually to a traditional IRA, with income limits affecting Roth IRA contributions. Traditional IRAs offer tax-deductible contributions, while Roth IRAs provide tax-free withdrawals in retirement.


Managing retirement contributions with an irregular income can be challenging. Here are some strategies to help:

Emergency Fund: Before focusing on retirement, build an emergency fund with 3-6 months of necessary expenses. This provides a financial cushion for unexpected events and ensures you won’t have to dip into retirement savings prematurely.

Pay Yourself: After establishing an emergency fund, treat retirement savings like any other monthly bill. Start with a manageable percentage of your income and adjust as needed.

Automatic Withdrawals: Set up automatic transfers to your retirement account to ensure consistent contributions. This reduces the temptation to spend the money elsewhere.

Windfalls: Use unexpected income, such as tax refunds or gifts, to boost your retirement savings.

Set Up a Schedule: If your income varies, contribute to your retirement account on a schedule that aligns with your income patterns, such as quarterly.

Tax-Time Commitment: During tax season, review your finances and decide how much to allocate to retirement based on your earnings and savings.

Mix It Up: Combine these methods to create a flexible and effective retirement savings strategy. For example, start with an emergency fund, set a target percentage for retirement contributions, and adjust based on your income and expenses.

Self-employment can be financially unpredictable, but with careful planning and commitment, you can build a secure retirement fund. Establish a plan that works for your unique situation and stick to it to ensure a comfortable and stress-free retirement.


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