Different Retirement Plan Options for Self-Employed Workers

While there’s certainly plenty to be gained by skipping the average nine-to-five and going into business for yourself, you may have noticed that there are also some drawbacks involved. For example, you no longer receive benefits like medical and dental insurance. If you want them you’ll have to pay out-of-pocket. On the upside, you can charge three times more money as a contractor than you earned as a regular employee. So there are definitely pros and cons. However, one perk of being employed by a company that you’ll no doubt miss is the access to a 401K plan, not to mention matching contributions. Luckily, you can find all kinds of options for retirement plans when you’re self-employed, even some that let you contribute as both employer and employee. Here are just a few that you should definitely consider contributing to sooner rather than later.

The most accessible option for anyone who is self-employed is the Roth IRA. This retirement plan is structured similarly to a 401K in several ways, so you should be familiar with how it functions if you’ve had a 401K account in the past. You’ll basically start by selecting a fund that appeals to you, and a financial planner or stock broker should be able to help you find something suitable depending on your goals (age at which you want to retire, level of risk you’re comfortable with, etc.). From there you decide how much you want to contribute. Since Roth IRAs are tax-deferred only up to a certain amount per year, you might want to cap your contributions at that number. For 2013, you may contribute $5,500 tax-deferred (you just write it off at tax time), or $6,500 if you’re over the age of 50. However, they are also compound interest accounts. So the more you contribute (even if it’s not tax deferred) the more you stand to gain over time.

Another good option is the SEP (simplified employee pension) IRA, which allows you to contribute as much as 25% of annual pre-tax earnings (with a $51,000 cap for 2013). The only real problem is that you will contribute to this plan as an employer rather than an employee, which means you must have a bonafide business if you want to set up such a plan. And if you ever hire other employees to your business this could become very costly because each employee under this system must receive equal contributions. However, as a business owner (even if you’re the only employee) you also have the options of setting up your own 401K.

The benefit here is that you can contribute as both an employee and an employer, meaning that you can basically double-dip on tax-deferred contributions. However, anyone who is self-employed part-time but still works at a job with a 401K should be careful. Contributing to multiple 401K accounts does not actually net you additional tax-deferments. You have to spread your contributions over multiple accounts within set limitations. If you want to learn more about these options you can always check in with the IRS or hire yourself a financial advisor. You might not need a firm like Selby Associates (which helps small businesses that earn in the $1 million to $25 million range), but there are plenty of financial planners that can help a self-employed person like yourself to choose and set up the best possible retirement plan.

One thought on “Different Retirement Plan Options for Self-Employed Workers

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