Retirement account options for the self-employed

Work for yourself and still retire comfortably by diligently saving in any one of these retirement account options for the self-employed.

As self-employed individuals we don’t have the luxury of our employer setting us up with a 401(k) retirement plan to ensure our financial future. We most likely don’t have a pension plan of any kind and I am sure we all can sit around and debate the topic of social security. I for one do not want to count on anyone or anything else anyway to make sure I will be able to retire comfortably. I want to save regularly and fund my own accounts that I have control over. We don’t need to pay an expensive financial planner a boatload of money either to set up any one of these retirement account options for the self-employed. Places like Vanguard empower the individual and actually make it very simple to set up our own retirement accounts and invest the money we put into those accounts into low-cost index funds or ETFs.

The task of researching and trying to find out what is the best option for you may seem a little daunting. Hopefully, this article can be your guide to enlighten you and make you aware of the different types of retirement account options for the self-employed that are out there. I will also be providing links for you where you can go to research and dive deeper into the account options. I will be talking about five specific options I have discovered that you could possibly utilize depending on your situation. The five retirement account options for the self-employed that I am going to talk about are the:

  • Roth IRA
  • Traditional IRA
  • Simple IRA
  • Individual 401(k)

Roth IRA

I wanted to start with the Roth IRA because to me this is the easiest account to set up that most people probably qualify for. A Roth IRA is an individual retirement account that is great for younger, lower income workers who have a long time-horizon for investing and savings. With a Roth IRA you are saving your after taxed dollars, so when it comes time to withdraw money from your Roth you do not have to pay taxes on it. Also, if you choose to invest your Roth IRA money, which I would suggest that you do in an index fund, then all your growth from interest, dividends etc. are tax free as well when it comes time to withdraw your cash. By saving in a Roth IRA you are ensuring that you will have a stream of tax-free money you can utilize in your retirement.

The contribution max in 2015 that you can put into your Roth account is $5,500. You can contribute $6,500 dollars if you are age 50 or older. That is the max limit, you can contribute less if you want to. You can’t withdraw more than the original amount of money you have put into your Roth until age 59 1/2 without penalty. Again though, this account is for your retirement. You should not even be thinking about it and pretty much should forget it even exists until the next year when it is time to contribute money to it. However, another advantage of the Roth IRA is that you can withdraw your original amount, the principal amount that you have put into your account, penalty free at any time if you really, desperately need the money.

That pretty much sums up the Roth IRA account. I have listed a few links below that I have found to be good resources if you want to dive a little deeper and learn more about the Roth IRA account.

Traditional IRA

A Traditional IRA account is similar to a Roth IRA account in how much you can contribute each year. The biggest difference with the Traditional IRA account is that the account is a tax-deferred account. This means that the money you contribute each calendar year can be used as a tax break on your overall income for that year. The catch is that when you then withdraw your money in retirement from your Traditional IRA the government will tax you on those withdraws. The IRS treats your Traditional IRA withdraws or distributions as regular income. The Traditional IRA then may pose advantageous to someone, probably a lot of self-employed, independent contractor people out there who are expecting to owe the government some money come tax time. This is the main advantage of the Traditional IRA as seen by people looking to lower their taxable income by making contributions to this type of retirement account. Below is a link to a table that compares the Traditional IRA to a Roth IRA and explains Traditional IRA’s in more detail.


SEP IRA stands for Simplified Employee Pension Individual Retirement Arrangement. The SEP IRA functions just like the Traditional IRA in the sense that it is a tax-deferred account. The SEP IRA is a good type of retirement account to look into if you are a small business owner looking to establish a retirement account for yourself and your employees. Even if you are a business owner that doesn’t have any employees you can still set up a SEP IRA and contribute to it.

For example, I own another small business outside of Bullseye Media, where I operate as a sole-proprietor with no employees. I am my own employer and employee, so I am eligible to open up a SEP IRA on my own behalf and contribute money to myself, from myself. It is a beautiful thing.

So to quickly recap, all SEP contributions are made by the employer. Their employees can contribute to personal IRA accounts. So, if you are your own employer and employee you can contribute to a Roth IRA and SEP IRA if you want to.  According to Vangaurd’s website, the maximum contribution can’t exceed the lesser of:

  • 25% of the employee’s total compensation (25% of your own self-employment income) Or
  • $52,000 for the 2014 tax year or $53,000 for the 2015 tax year.

SEP contributions are deductible as a business expense and you do not have to contribute every year. The money you contribute is tax-deferred, it is taxed at a later time when you start withdrawing your contributions in retirement. To learn more about SEP IRAs and how they can help you, check out some some of the links below.

Simple IRA

The Simple IRA is good for the small business owner that is looking to share the responsibility of contributing to a retirement account with their employees. Simple IRA stands for Savings Incentive Match PLan for Employees. The Simple IRA is beneficial to set up as the first retirement account that you, the small business owner, offers to your employees. Usually the plan is easy to set up and administrator and the start up costs are usually lower. Both you the business owner and the employees of the business both contribute money to the account.

The Simple IRA is a tax-deferred account just like Traditional and SEP IRAs, this means again that you and your employees are contributing pretax dollars and the taxes will be paid on that income when the account holders start withdrawing that money. I don’t know enough about Simple IRAs, as I do not hold one, to be able to discuss all the ins and outs and contribution limits. I wanted to bring it your attention that a plan like this does exist if you are a business owner with less than 100 employees looking to establish low cost, low maintenance retirement plans for your employees. There are a lot more to Simple IRAs so please reference the links below that will provide more information about Simple IRA accounts.

Individual 401(k)

The Individual 401(k), aka solo 401(k), is a lot like a traditional 401(k) plan that is offered to employees of large companies. However, hence the name Individual, this type of retirement account is for the self-employed, sole-proprietor individual that has no employees working for them. The solo 401(k) works a lot like the SEP IRA that was discussed above in this article. The main difference is how you choose to set up your solo 401(k). You can set up your solo 401(k) to work like a Traditional IRA or a Roth IRA.  So again, you can set up a solo 401(k) that works as a tax-deferred account (Traditional) or an after tax account (Roth) depending on how you want to set it up.

The solo 401(k) allows you to contribute a very high amount of your self-employed income which makes it an ideal account if you are someone that makes a lot of money on your own. You can also choose to invest the money you contribute in almost any type of investment you can think of. Another major benefit is that you can take out a loan of up to 50% of the total value of your account. An interesting benefit that many small business owners may really like if they need a loan to run their business.

Below I have listed some more links so you can dive deeper and learn more about the Individual 401(k) retirement account.

There you have it. I hope this article was informative and will get you thinking about what may be the best option for you and your business. I also hope that the resources provided will help you to further research the retirement account options for the self-employed. Depending on your situation you may be eligible to set up more than one of these accounts to really try to maximize your retirement savings effort. If you are thinking about becoming self-employed but are worried about being able to retire comfortably, I hope this article eased some of those concerns by introducing you to the various different accounts that you could set up to save for your retirement. It is possible for self-employed individuals to retire and retire comfortably at that. Thank you for reading and please shoot me an email at or leave a comment below and let me know if you have any questions or concerns about any of the information that is provided above.

*Disclaimer: I am not a certified financial planner, tax adviser or CPA. The information provided in this article was written for informative and entertainment purposes only. You must do your own research and due diligence before setting up and contributing to any of the accounts above. Please consult a tax professional to make sure you qualify for any one account and that it is the right set up for your situation.

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