5 retirement savings options if you’re self-employed


If you’re self-employed, it’s easy to put retirement planning on the back burner, with everything else you have to deal with on a daily basis. This may explain why about 55 percent of self-employed Americans say they are behind on retirement savings, according to a TD Ameritrade survey. But retirement planning is as important for you as it is for everyone else. And, being your own employer, you have more choices. Here are five of them.

Like most other Americans, you can put thousands of dollars away each year in retirement accounts. But as a business owner, you can also put tens of thousands more in employer-sponsored accounts.

1. Traditional and Roth IRAs. Both traditional and Roth IRAs allow you to contribute up to $5,500 per year, or $6,500 if you’re 50 or over. However your contributions cannot exceed your gross income. Also, if your income is above a certain limit, which in 2015 was $193,000, then you cannot contribute to a Roth IRA. With a traditional IRA, your contributions are fully deductible as long as your spouse is not covered by an employee retirement plan.

2. SEP IRA. You can also set up a SEP IRA, which is an employer-sponsored retirement account. You can make contributions to a SEP IRA up to 25% of your income or $53,000 whichever is less. These contributions are separate from your contributions to a traditional or Roth IRA. Even if you cannot contribute to a Roth IRA because your income is too high, you can still contribute to a SEP IRA or SIMPLE IRA.

3. SIMPLE IRA. A SIMPLE IRA is another employer-sponsored retirement account. You can contribute up to $12,500 (in 2016) to a SIMPLE IRA, or $15,500 if you’re age 50 or over. A SIMPLE IRA also comes with a 3% employer match.

4. Solo 401(k). Solo or individual 401(k)s are for self-employed individuals with no employees. You can contribute to your solo 401(k) as both an employee and employer. In 2016 the employee can contribute all of their income or $18,000 whichever is less ($24,000 if 50 years old and above). The employer can contribute up to 25 percent of total earnings with a maximum combined contribution of $53,000 ($59,000 if 50 or older).

Both SEP IRAs and solo 401(k)s are tax deductible to the employer. Also there are no minimum contributions each year, which is useful for those whose income is variable from year to year. These accounts also give some flexibility in timing of contributions; you can contribute up to the filing deadline of your tax return, including any extensions.

SEP IRAs are favored by many sole proprietors because they are relatively easy to set up and have low administrative costs. Solo 401(k)s are more complicated to create and require a plan administrator. There are also initial and recurring administration costs. The tax implications are also more complicated. If the 401(k) balance exceeds a certain balance, there are additional tax forms to be filed.

5. Defined benefit plans. These are typically associated with executive-level employees of large companies, but are also available to the self-employed. These come with a contribution limit of the total of the employee’s income or $210,000 in 2016. Defined benefit plans are complex to set up and administer, and are best suited for those with high incomes who are looking to catch up with their retirement savings. You are required to make annual contributions, which makes these plans possibly not suited for those with unpredictable incomes. You can combine a defined benefit plan with another retirement account to ramp up your savings to hundreds of thousands of dollars per year.

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