Self-Employment And Retirement: It's Not An Inevitable Dead End

Self-employment has many benefits. At best, you get to be your own boss — regulating the hours you work, the amount you work and setting your own pay scale. On the downside, however, self-employees must pay quarterly estimated taxes — as they are both the employer and the employee, the responsibility falls upon the individual — budget for on-the-market insurance and prepare for retirement without an employer-offered retirement plan.

As the saying goes, misery loves company: While comfort could be found in the universality of retirement anxieties, for the self-employed, the fears have an added intensity — a secured retirement is completely reliant upon the individual. Sure, self-employees still pay taxes, so social security in whatever iteration it exists at that point will be available. But, there are no company contributions or company matches or employee provided funds. Saving for retirement outside of social security is up to the individual.

So, What Options Are Available?

While it is feasible — although not highly advisable — to rely on Social Security as the sole source of financing retirement, there are options available to freelancers looking for ways to plan for their retirement beyond a standard savings account.

Below are just four retirement plans for freelancers/self-employees. One of the benefits to keep in mind about going the retirement fund route is that these can actually reduce taxable income while simultaneously helping secure a happier retirement.

Defined Benefit Plans: These plans are similar to the pension plans once so popular. On the positive side, these plans have very high contribution limits, which can be written off as expenses and the growth on contributions is tax-deferred as well. On the less-positive side, these plans are typically expensive and labor intensive to establish. One other downside to defined benefit plans is that if you have employees, you must offer the plan to them and make contributions on their behalf. Most notably, contributions are strict, with funding at a pre-determined level dictating every year’s contributions.

Savings Incentive Match Plan For Employees (SIMPLE IRA): These IRAs are simple to set up and simple to maintain. Like all on this list, expenses are deductible and growth is tax-deferred. On the more negative side, contribution limits are lower than other options, they count against 401(K) contributions and there are lots of regulations for maintaining the fund.

Simplified Employee Pension (SEP IRA): Like SIMPLE IRAs, SEP IRAs are easy and simple. Contributions are tax-deferred and so is the growth until withdrawals begin. Furthermore, contribution limits are high. On the other hand, if you have employees, they must all be included in the plan and the employer (you) cannot contribute more to yourself than others.

Solo 401(K): Unlike Defined Benefit Plans, Solo 401(K)s afford users with a high level of flexibility, allowing the account holder to contribute as much or as little (up to the limit) year-to-year. Contributions are pre-tax, like all 401(K)s. On the downside, Solo 401(K)s are only available for self-employers who have no employees (an exception is a spouse) and if the account has $250,000 in it, a report must be filed to the IRS annually.

How To Decide

As with most things financial, weighing the pros and cons of multiple options is one of the surest ways to determine what risks you are willing to take based on what rewards you hope to receive.

The following infographic is derived from JD and CFP Rachel Podnos’ blog post on the matter.

As with all financial decisions, when in doubt, talk it out. Use the resources available to you and reach out to your financial advisor if you have questions about securing your retirement.

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Self-Employment And Retirement: It's Not An Inevitable Dead End

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So, What Options Are Available?

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