Many people choose to be self-employed for the freedom and autonomy this type of work provides and the potential to make unlimited income. There are 15 million Americans who were self-employed in 2015, according to the Bureau of Labor Statistics. But self-employed people must forge a future without many meaningful benefits. The self-employed have to buy their own health care and save for their own retirement.
However, self-employed individuals have many options to save for retirement, many of which have unique advantages. Here are some of the best ways for nearly any entrepreneur, business owner or freelancer to save for the future:
[See: How to Reduce Your Tax Bill by Saving for Retirement.]
1. SEP IRA. Contributing to a SEP IRA will decrease your tax burden, and your money will grow tax-deferred until retirement. Workers can contribute up to 25 percent of their compensation or $54,000 in 2017, whichever is less. “This type of retirement account is simple in nature to establish, and provides plenty of flexibility in terms of investment options,” says Anthony Montenegro, a financial advisor and founder of Blackmont Advisors in Orange County, California. You can open this type of account at most banks, mutual fund companies or brokerage firms. Some financial institutions make it easy to open an account online.
2. Tax-deferred annuities. Tax-deferred annuities allow self-employed entrepreneurs to delay taxes on compound interest. “If the entrepreneur has funded traditional tax-qualified retirement accounts to the annual maximum and still has additional money to invest for retirement, tax-deferred annuities allow the entrepreneur to deposit additional money into the plan and enjoy tax-deferred growth much like the traditional tax-qualified retirement vehicles offered and used by entrepreneurs,” say Matthew Jackson, a financial advisor for Solid Wealth Advisors in Fort Collins, Colorado.
It might take some effort to find an annuity that’s tax-deferred and has low fees, and there are also some drawbacks. “The biggest difference for these contributions is they cannot be used to decrease the tax burden for the year they were made,” Jackson says. In other words, your contributions aren’t tax-deductible. And while many annuities provide the benefit of a lifetime of guaranteed income, you may not be able to use the money in the annuity for an emergency or leave it to heirs.
[See: How to Max Out Your 401(k) in 2017.]
3. Solo 401(k). This plan can be a smart option for high earners, mostly because it offers some of the highest contribution limits. Those who contribute to a solo 401(k) can make an annual salary deferral of up to $18,000 in 2017. If you’re age 50 or older, you can boost that amount by $6,000. In addition to those amounts, you can contribute up to 25 percent of your net earnings from self-employment up to a total contribution of $54,000 for the year.
The biggest downside with this type of plan is that you can’t use it if you have employees other than your spouse. Further, you’ll have to fill out quite a bit of paperwork to open a Solo 401(k), more so than if you had chosen a SEP IRA instead.
4. Traditional or Roth IRA. While a traditional or Roth IRA shouldn’t be your main retirement account due to the small contribution limits, these are great supplementary options that can allow you to save more than you would otherwise. The key is deciding which type of IRA is best based on your tax situation and income.
Traditional IRAs and Roth IRAs are taxed differently. When you contribute to a traditional IRA, your contributions are tax-deductible, provided you meet certain income requirements. Your money then grows on a tax-deferred basis, where it can keep growing until you’re ready to start taking distributions in retirement. You will need to pay income tax on those distributions.
Roth IRAs work in an opposite fashion since all contributions are made in after-tax dollars. Your money grows without being taxed each year. And since your Roth contributions were made with after-tax dollars, you don’t have to pay income taxes on distributions in retirement. For most people, that tax-free investment growth is a huge benefit. However, you can’t contribute to a Roth IRA if you earn too much money. In 2017, your ability to contribute starts to phase out at $186,000 if you are married filing jointly, and you can’t make depots if your income tops $196,000.
The IRA contribution limits are also low. You can only contribute up to $5,500 across both traditional and Roth IRAs each year. If you’re age 50 or older you could invest an extra $1,000 as a catch-up contribution.
[See: 9 Ways to Avoid 401(k) Fees and Penalties.]
5. SIMPLE IRA. The savings incentive match plan for employees is often used by small business owners with employees, but it also works for solo entrepreneurs and the self-employed. The money you contribute is tax-deductible and grows tax-free until you start taking distributions.
The benefit here is just how simple the SIMPLE IRA is to set up. In most cases, you’ll fill out a few forms, select your investment options and you’re done. This type of plan is also more affordable than some others to manage, mostly because it has lower administrative costs.
The downside of a SIMPLE IRA is that contribution limits are lower than some other types of retirement accounts. As of 2017, self-employed workers can contribute up to $12,500 in 2017. Participants age 50 can older are eligible to contribute an additional $3,000 catch-up contribution.
Jeff Rose is a certified financial planner, U.S. combat veteran and the founder of GoodFinancialCents.com.
More from U.S. News
How to Pay Less Taxes on Retirement Account Withdrawals
10 Tax Breaks for People Over 50
5 Challenges of Early Retirement
5 Ways to Save for Retirement When You’re Self-Employed originally appeared on usnews.com
