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Fortunately, freelancers or self-employed remote workers (even if it’s only part-time) have many more ways to save for retirement than traditional employees.

Although it may not be necessary to know every single option available, the top 3 are all worth taking a look at.

We’ll discuss the SEP, the Solo 401(k), and the Roth in this post. 

Let’s take a look at the unique benefits each of these retirement plans have, how they work, and which one may be best in your situation. 


Overview: SEP stands for Simplified Employee Pension, but don’t let the word pension fool you – it works more like a traditional IRA.  You’ll deduct your contributions to your SEP in the same year that they’re made, but the money is not taxed until you withdraw at retirement. If you plan on moving to a state with no income tax when you retire, this will minimize your tax burden NOW and LATER. The 7 states that currently do NOT tax income are listed here

If you withdraw money from the account before retirement age, the full withdrawal is subject to both income taxes and penalties. At retirement age, withdrawals are subject to income tax at your ordinary tax rate.

The Benefit: You can make contributions for last year THIS year until your tax-filing deadline. This makes the SEP an ideal retirement plan for those who may be facing a hefty tax bill and have the money saved up to contribute. For 2018, the maximum contribution was $55,000 and it jumps to $56,000 in 2019.

Who it’s good for: Those with a lot of income without too many deductions or expenses and are certain they can hold off accessing the money until retirement.

Yearly limits for contributions: $56,000 in 2019 or 25% of your total business income, whichever is less.

The best self-employed retirement plan options

The Solo 401k

Overview: A Solo 401(k) plan is just a bit more complicated to set up since they have to follow most of the rules for corporate 401(k) plans which includes annual reporting. All contributions are tax deductible in the year that they’re made and like a SEP IRA, the money isn’t taxed until it’s withdrawn at age 59 1/2. This is definitely a half-birthday you’ll want to celebrate if you live in a state that doesn’t tax retirement income!

The benefit: Actually, there are 2 benefits to a Solo 401(k). The first is that you can make your contributions as both “employer” and “employer,” which is fantastic if you’re able to live on less money. Basically, as an “employee” of your business, you can contribute up to $19,000 in 2019 AND you can contribute another 25% as the business owner (employer). For example, if your business makes $100,000 this year, you could save 44% of your income, or $44,000 in a Solo 401(k). That breakdown is from the $19,000 that you (as an employee) contributed PLUS the $25,000 (25% of $100,000) that you contributed as the employer. 

The second benefit of a Solo 401(k) is that it allows for loans. This essentially gives you the option to temporarily dip into your retirement funds without any taxes or penalties so long as you repay the money within a set period of time. You have to establish the rules for this and document it when you set it up, so because of this added complexity, it’s best to consult with a CPA and lawyer if this is something you want to do. T

Who it’s good for: Anyone in a high tax bracket and people who want to save a large percentage of their income. For example, those of us who try to live on half our total income and save the rest to be financially independent! 

Yearly limits for contributions: 25% of total business revenue + $19,000 as an “employee” for a total not to exceed $56,000 in 2019.

The Roth IRA

Overview: These Roth IRA contributions are NOT tax deductible, however, both the earnings (interest) and principal (what you put in) can be withdrawn at retirement tax-free.

The benefit: You’re allowed to take out money in this account for specific emergencies before retirement without tax or penalty. Ideally, you’ll first have these set up before you contribute to a Roth IRA:

  • $1,000 in your checking account. Fast cash for things like deductibles, emergencies that are time-sensitive, and it’s always nice to have a buffer in your checking account that never dips below $1,000.
  • 3-6 months of your current expenses set aside in a high-yield savings account. This is for more serious emergencies such as a loss of a job, a major medical bill (you can also set up an HSA for that, but that’s another post), a huge “out-of-nowhere” expense, etc. It will take a few days to get to your checking account, but it’s not untouchable like some retirement accounts and you won’t pay a penalty.
  • 3-6 months of your current BUSINESS expenses in your business checking account. If you run a business, you should know how much is coming in and out every month. Multiply that by 3 at the least, and keep it in your business bank account. If you lose a client or have a seasonal dip in sales, it’s nice to know you don’t have to go cancel services to stay in business.

Now that we have those tips out of the way, let’s say that you put $5,000 each year into a Roth IRA for 10 years straight and earn an average return of 10%. (Honestly, I like to bet on 6%. Dave Ramsey says 12 which is unrealistic, but let’s go with 10 since it’s easy to calculate). Let’s say you get into an accident and can’t work for 6 months and you, unfortunately, didn’t get short-term or long-term disability insurance (which you should, but that’s for another post).

Without your 6-month emergency fund, you’d have a heck of a time supporting your family and/or paying your bills.  In this very real situation, what do you do? Well, your Roth IRA, after 10 years of $5,000 at 10% interest is now worth $85,352. You can take out your contributions of $50,000 since those were put in, not earnings. However, if you take out more than the $50,000 you contributed, the interest earned will be subject to penalties and taxes. $50,000 should get you through 6 months, and at least you still have the remaining $35,352 from interest.

There are a few restrictions. If you earn more than $193,000 and file married jointly, or earn more than $122,000 and file single, you can’t contribute as much. If you make $137K or more as a single or $203K or more when married, you can’t contribute at all, so refer to the first 2 options above.

Who it’s good for: Ahhh, well, if you’re financially insecure and young, this makes the most sense. In fact, the younger you are the more you’ll benefit from the tax-free withdrawals when you retire. 

Yearly limits for contributions: $6,000 annually (if you’re over 50, you can contribute $7,000 to catch up)

Hopefully, this helped those of you who are self-employed realize the benefits and options you have for retirement. One of the biggest “wins” in the 2018 tax law changes was that whether you’re taxed as an LLC, sole-proprietorship, or S-Corps, 20% of your business income is NOT taxed at all. That means, unlike an employee who has to pay taxes on 100% of his or her income, as a business owner, you only have to pay taxes on 80% of that. There’s really never been a better time to start a business and start saving money!