Being self-employed comes with plenty of perks. You are your own boss. You set your own schedule and can take the day off without asking anyone’s permission.
On the other hand, you don’t have the built-in retirement plans — with the employer’s matching contributions — that so many other jobs can provide.
So you’ve got to come up with your own plan to save for retirement. And trust us, you do need to save for retirement.
Especially since the arrival in the pandemic in early 2020, we’ve seen a massive increase in the number of people taking their first leap into self-employment. It can be an exciting time, but there is a lot to consider.
You’ll want to make sure you’re planning ahead for retirement, so here are four options to get you started.
IRA (Traditional or Roth)
WHAT IT IS: IRA is short for Individual Retirement Account, and it comes in two primary options. A traditional IRA offers an immediate tax break. A Roth IRA guarantees you tax-free income upon retirement.
THE BENEFITS: IRAs are easy for anyone to set up whether through an online broker or a financial advisor. They offer a flexible set of investment options.
THE DRAWBACKS: Compared with other retirement savings plans, IRAs restrict you to relatively low contribution limits — only $6,000 a year for people under the age of 50 in 2022.
WHAT IT IS: A Solo 401(k) is similar to an employee-sponsored 401(k) plan. You can make contributions both as an “employer” and an “employee.” However, business owners cannot utilize this plan if they have employees other than their spouse.
THE BENEFITS: Combining contributions categorized as “employer” and “employee,” you can contribute up to $61,000 in 2022 if you are under 50 years old or $67,500 if you are 50 or older.
THE DRAWBACKS: Solo 401(k) plans can be more complex and require more administrative work than other retirement savings plans.
Simple Employee Pension (SEP) IRA
WHAT IT IS: A SEP IRA is set up similarly to a traditional IRA, but it has higher contribution limits. You can up to 25% of your net earnings — up to a maximum of $61,000 in 20222.
THE BENEFITS: Contributions are tax-deductible and can be made for the prior year up to the due date for filing that year’s tax return. Having a SEP IRA does not (and should not) prevent you from also contributing to a traditional or Roth IRA.
THE DRAWBACKS: As with some other retirement savings plans, you will be hit with a 10% penalty if you opt to withdraw funds before the age of 59 1/2.
Savings Incentive Match Plan for Employees (SIMPLE) IRA
WHAT IT IS: A SIMPLE IRA is designed for business owners with 100 or fewer employees. You can contribute up to $14,000 in 2022 or $17,000 if you are 50 or older. Self-employed people can contribute as both an “employer” and “employee.”
THE BENEFITS: SIMPLE IRAs are easy to set up and maintain, and contributions are tax-deductible.
THE DRAWBACKS: You cannot, with rare exceptions, contribute to a SIMPLE IRA if you have other retirement plans, such as a traditional or Roth IRA. For the first two years of participation, funds cannot be rolled over to another plan.