What’s a Blogger to do? The Best Retirement Plans for the Self-Employed.

Calling all gig workers, freelancers, dancers, bloggers, or otherwise self-employed peps, are you unsure of what retirement options you have?  Do you know what accounts you should be using to save for retirement?  Matter of fact, what are the best retirement plans for the self-employed?

If you are anything like me, you may have wondered what’s a girl to do?  I mean, we don't have an employer match program of which to take advantage.  Or do we?

I just started my journey as a blogger not too long ago but it suddenly struck me as I was writing one day.  Are there any retirement options for me?  

If you are part of Team Self-Employed, you may have been too focused on growing your business, booking gigs, or acquiring clients to have even thought about planning for your future.

But you don’t want to wake up 20 or 30 years from now with retirement right around the corner to realize you only have $5 to your name.  

Now, as always, is the best time to plan.  Don’t wait.  Start Today.

*Note: In this post, I will focus mainly on the freelancers, bloggers, or other solopreneurs and not on small business owners with employees.  I will write another post on that later.

Here’s a rundown of the Best Retirement Plans for the Self-Employed:

¹No taxes now but pay taxes on withdrawal.

²Pay taxes now but withdrawals are tax-free.

*note: All values shown are for the 2020 tax year. 

As you can see, we have a good selection to choose from.  Now let’s take a closer look at each of them.  You may be better suited to one than the other so look over each carefully.  

I included the SIMPLE IRA above but I think, personally, its better suited for small business owners with employees and not solo entrepreneurs.  There are way better options out there for us.

Solo 401k (Individual 401k)

The Solo 401k is only available to solopreneurs, business owners, and their spouses. You are not allowed to have any full time employees.  

It is an excellent option for saving up extra cash especially if you include your spouse in it as well. By hiring your spouse, you will be able to double up on your savings for retirement.

Contributions

Although the standard 401k rules and limits apply, the Solo 401k is a special case where you are both the employee and the employer.  

As the employee, you can contribute up to $19,500 pre-tax dollars (for 2020) to your 401k plus the catch up contribution of $6,500 if you are over 50 years of age.

Then as the employer you are welcome to add an additional contribution of up to max 20% of your earned income (i.e. income – ½ self-employment tax – your initial contribution, see below for how to calculate).  

The max contribution is $57,000 for the 2020 tax year.  Gotta love that employer match!

And bonus point good news, your employer contributions are per plan and not per person.

So even if you have another 401k with another company, no matter what that employer contributes, you, as the employer in your Solo 401k can still contribute up to the max $57k per year from your business.

Be aware though as an employee you are subject the $19,500 limit on ALL 401k accounts.  So if you contribute the max to your main job’s 401k, you cannot contribute that money to your Solo 401k.

With the Solo 401k, you are not required to contribute every year thankfully but should your total assets exceed $250,000 you must start filing Form 5500 with the IRS annually.  

Additionally, the same 10% penalty applies for early, unqualified withdrawals of funds.

Roth 401k

There is a Roth 401k option available as well and should be used if you believe that you will be in a higher tax bracket later.  The same contribution limits apply.

This is a great way to sock away extra tax-free money for retirement, as the limits are well higher than Roth IRAs and you aren't subject to income restrictions!

Related:  Tax Efficient Investing: Tax Strategies to Save You Money

SEP IRA

The simplified employee pension (SEP) is another great option as it gives you the ability to put away a lot of money for retirement.  Its contribution limit is either $57,000 or max 20% of your earned income whichever is lower.

It is similar to the Solo 401k with contributions being deductible and future withdrawals being taxed. The same salary limit of $285,000 applies in calculating the max contribution your business can make to your account (See below). 

Also, you don’t have to contribute to SEPs every year.

Unlike the 401k, there is no Roth version and there are no catch up contributions for people over 50.  SEPs are easier to maintain than a 401k though with low administrative work and no annual IRS reporting required.

SEPs must be set up by the time you file your taxes and you will need to fill out Form 5305 to do so. You don’t need to send the form in to the IRS, just keep it on file.  The SEP is a good fall back plan should you forget to set up your solo 401k by its December deadline.

SIMPLE IRA

The Savings Incentive Match Plan for Employees (SIMPLE) is an IRA account that, in my opinion, is better suited for small business owners with less than 100 employees.  

However, the SIMPLE IRA is easier to set up and if you plan on getting employees later on this plan makes adding them less of a hassle.

There is a trade off.  If you go with the SIMPLE you cannot have any other retirement plan.  Also, contribution limits are much lower: $13,500 ($13,000 in 2019) plus a catch up contribution of $3,000.  

These contributions are tax deductible but you will have to pay income taxes upon withdrawal.

Employer Match

Employers must contribute to their employee’s SIMPLE accounts.  So you can decide whether to make matching contributions of up to 3% of your pay or a fixed contribution of 2% of pay, where the compensation limit to be used in this calculation is $285,000 (for 2020). 

So if you make $400,000 and choose to go the 3% matching route, as the employer you would contribute $12,000.  However, if you choose to do the fixed 2% contribution, you will only be able to contribute $5,700 as this is subject to the $285k compensation limit.

The SIMPLE can be a bit strict.  Early withdrawals are subject to the usual 10% penalty however if it is made within the first two years of opening the account that penalty jumps to 25%.

Loans are not offered with a SIMPLE IRA but there is another kind of SIMPLE: the SIMPLE 401k.  With the SIMPLE 401k, you can make it possible to take out loans. 

However, should you go this route, all employer contributions are subject to the $285k compensation limit.

Traditional/Roth IRA

I have covered Traditional and Roth IRA in a previous post.  Check out my in depth explanation here.  I'm biased for the Roth though!  Here are some key facts:

Qualified Plans (Keogh plans or H.R. 10 plans)

Formerly known as Keogh Plans, these H.R. 10 or qualified plans are best suited for high earning entrepreneurs such as doctors and lawyers.  Businesses can also elect to use these.  However, your business must be an LLC, sole proprietorship, or partnership, no corporations allowed.

Similar to the 401k and traditional IRA, you may begin withdrawing your money at age 59 ½ but there are required withdrawals starting from 72. 

The downside of Keogh plans is that there is a lot more paperwork and fees associated with setting up and maintaining one.  Those who wish to set one up must do so by the end of the tax year: December 31^st. 

The Defined Contribution Plan

With the defined contribution plan, you can make additions to your retirement account by way of a profit sharing plan or a money purchase pension plan.  Contributions made to these plans are tax deductible with taxes only being paid on withdrawal.

Profit Sharing Plan

Under the profit sharing plan, your yearly contributions are not fixed and you may skip a year if you wish.

As an individual self-employed person your business does have to make a profit in order for you to contribute to your plan.  You can make contributions up to 25% of your income OR $57,000, whichever is lower.  

Of the qualified plans, the profit sharing plan is the most flexible.  There is a catch-up contribution of $6,500 for anyone over 50. And you must fill Form 5500 annually.

Money Purchase Plan

Unlike the profit sharing plan, the money purchase plan requires fixed annual contributions.  These contributions are not based on your company profit but you can choose to contribute a percentage of your salary.  

The contribution limits are $57,000 or 25% of your pay, whichever is lower.

Contributions over the deduction limits are nondeductible but as long as it meets the minimum requirements of your plan the 10% excise tax doesn't apply.

It is less flexible than the Profit Sharing Plan as you are required to allocate a fixed percentage of your profit each year to the plan. You are also required to file Form 5500 every year.

The Defined Benefit Plan

This is basically the modern day pension plan. Perfect for when you are close to retirement and want to assure you have a certain amount of cash flow during retirement.

Actually setting up and continuing with a defined benefit plan is tricky and requires professional help and support.  This will probably mean more administrative work and more fees.

The max contribution for this plan is $230,000 for the 2020 tax year OR 100% of your salary based on your highest 3 consecutive years, whichever is lower. These contributions must be made quarterly and is due 15 days after the end of the quarter

As with the money purchase plan above, contributions over the deduction limits are nondeductible and as long as it meets the minimum requirements of your plan the 10% excise tax doesn't apply.

To participate in the plan must be at least 21 and have worked with the company for at least 1 year.

HSA (supplemental)

I feel like I am always talking about HSAs because they are my favorite savings/retirement account! HSA stands for Health Savings Account and this is open to individuals or families who have high deductible health plans (HDHP).

I personally think it's the best because it is triple tax-advantaged.  Its contributions are tax deductible, its earning grow tax-free, and if you take out money for medical purposes, those withdrawals are tax-free as well. That’s a win-win-win in my book! 

When you turn 59 ½ it doubles as a regular retirement account, so now you can take out money for non-medical purposes and there won’t be a penalty.  The tax man however will be there to take his cut.

Deduction limits for Self Employed

As someone who is self-employed, you won’t have the same deduction limits as everyone else.  You will need to calculate how much you can deduct by yourself or maybe pay someone to do it for you.  

This will determine how much you, as the employer, are able to contribute additional funds to your retirement.

Based on your plan’s contribution rate, you must calculate your reduced contribution rate which you will need to determine your maximum deduction limit.

There is a rate table in IRS Publication 560 that helps you calculate it or you could do a by hand calculation yourself.  For example, if your plan’s rate is 10%, your reduced rate would be 0.0909.

Here are the steps to calculating your maximum deduction:

1. Take your net profit and subtract out ½ self employment tax. 
2. Then multiply this by your reduced rate (see table below).
3. Then take 285k multiplied by your plan’s rate. Is this number smaller than the reduced rate number?
4. Then use this and compare it to the contribution limit, which is $57,000 in 2020. Choose which ever is smaller.  This is your maximum deductible contribution.

Reduced Contribution Rate Table

*deduction can’t be more than 20% of net income

Where to Open Your Account

I recommend one of these top brokerages.  They have great customer service and some of the lowest fees around.  

• Vanguard
• Fidelity
• Schwab

Each brokerage may have different rules for how they treat certain retirement accounts. Be sure to check!

Looks Like You Are All Set

I am hoping that since you are still here reading this to the end you won’t be like the 28% of self-employed people who have yet to start planning for their retirement.  

For some of us, this hustle to find clients, book gigs, and make sales will someday come to an end.  We just have to make sure that when that day comes, we have something to show for it.

High Five one time for Team Self-Employed! Boom! 

Happy Saving!

Related Questions

Can I Contribute to a Self-Employed SEP and My Employer’s SIMPLE IRA?

As long as you are not an owner in the other company, you can contribute to both plans.

If I have a side hustle and work for a company can I still open up a solo 401k, etc.?

You can open up a solo 401k even if you are working for a company that offers retirement options.  Just be aware that your individual contributions for ALL 401k accounts is max $19,500 plus catch-up contributions.