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One of the biggest financial challenges you will face in life is saving for retirement. As an employee, it is typically a lot easier.  Most employers now offer a retirement plan, allowing employees to defer some of their wages to their retirement plan automatically.

The challenge gets bigger when you are self-employed. To live Financially Well, creating a retirement plan is vitally important when you are self-employed.  However, entrepreneurs get so wrapped up in the day-to-day running of their businesses that retirement planning often gets put on the back burner.  Only 13% of self-employed people who run a single-person business participate in a workplace retirement plan. That is a problem. If you are self-employed, you are busy, but retirement savings (paying yourself first) must be a priority.  Many people think of retirement money as the money they put away, if there is any cash left at the end of the month or year (paying yourself last). Try to set aside a certain portion of your income the day you get paid before you spend any discretionary money.


Saving is Hard for the Self-Employed

You will need to be highly disciplined in contributing to your retirement plan.  Because the amount you can contribute to your retirement accounts often depends on how much you earn, you won’t know until the end of the year how much you can contribute.  Because of this, it is critical to create a budget and set aside money throughout the year.


Choose the Right Retirement Plan for You

There are four retirement savings options favored by the self-employed. Their complexity and suitability vary.  They are:

  • One-participant or Solo 401(k)
  • Keogh plan


Here is a quick overview of each plan:


One-Participant or Solo 401(k)

one-participant 401(k), Solo 401(k), Solo-k, Uni-k, or Individual 401(k), is reserved for sole proprietors with no employees, other than a spouse working for the business.


How a Solo 401(k) Works

The one-participant plan is very similar to the 401(k)s offered by many larger companies, down to the amounts you can contribute each year. The main difference is that you get to contribute as the employee and the employer, giving you a higher limit than many other tax-advantaged plans.

If your spouse works for you, they can also make contributions up to the same amount, and then you can match those. So, the Solo 401(k) offers one of the most generous contribution limits of the plans.


Setting Up a Solo 401(k)

To establish an individual 401(k), a business owner must work with a financial institution, which may impose fees and limit the investments available in the plan. Do your due diligence and you can find a reputable and well-known firm that offers low-cost plans with a great deal of flexibility.



Officially known as a simplified employee pension, a SEP IRA is a variation on a traditional IRA. As the easiest plan to establish and operate, it’s an excellent option for sole proprietors, though it also allows for one or more employees.


How a SEP IRA Works

The employer alone contributes to a SEP IRA—not employees. You can contribute up to 25% of your net earnings (defined as your annual profit less half of your self-employment taxes).  

The plan also offers flexibility to vary contributions, make them in a lump sum at the end of the year, or skip them altogether. There is no annual funding requirement.

Its simplicity and flexibility make the plan desirable for one-person businesses, but there’s always a catch. Although you do not have to contribute to the plan each year, when you do contribute, you need to do so for all eligible employees, if you have people working for you.

While SEP IRAs are simple, they are not necessarily the most effective means of saving for retirement, since contribution limits are based on a percentage of your profits, which will vary from year to year. 


Setting Up a SEP IRA

The account is simpler to set up than a Solo 401(k). You can easily open a SEP IRA online at brokerages such as TD Ameritrade or Fidelity Investments.



Officially known as the Savings Incentive Match Plan for Employees, a SIMPLE IRA is a cross between an IRA and a 401(k) plan. Although available to sole proprietors, it usually works best for small businesses (companies with 100 or fewer employees).



The SIMPLE IRA follows the same investment, rollover, and distribution rules as a SEP IRA, except for its lower contribution thresholds. 

Employees can contribute along with employers in the same annual amounts. As the employer, however, you are required to contribute dollar for dollar up to 3% of each participating employee’s income to the plan each year, or a fixed 2% contribution to every eligible employee’s income whether they contribute or not.

One big disadvantage to the SIMPLE IRA is that early withdrawal penalties are a hefty 25% within the first two years of the plan inception.


Setting Up a SIMPLE IRA

As with other IRAs, you must open these plans with a financial institution, which have rules as to what kinds of investments can be purchased. They may also charge plan administration and participation fees. The process is similar to a SEP IRA, but the paperwork is more complicated.


Keogh Plan

The Keogh or HR 10 plan (more commonly referred to today as a qualified or profit-sharing plan) is arguably the most complex for self-employed workers. However, it also allows for the most potential retirement savings.


How a Keogh Works

Keogh plans today are most commonly set up as defined-contribution plans. 

A business must be unincorporated and set up as a sole proprietorship, limited liability company (LLC), or partnership to use a Keogh plan. Although all contributions are made on a pre-tax basis, there may be a vesting requirement. These plans benefit high earners, especially the defined-benefit version, which allows for greater contributions than any other plan.


Setting Up a Keogh

Keogh Plans have federal filing requirements, which can mean complex paperwork. As a result, it’s best to seek professional help from an accountant, investment advisor, or financial institution. 

A Keogh is best suited for firms with one or two high-earning bosses and several lower-earning employees.


Traditional or Roth IRA

If none of the above plans seem right, you can start your own individual IRA. Both Roth and Traditional Individual Retirement Accounts (IRAs) are available to anyone with employment income. Roth IRAs let you contribute after-tax dollars, while traditional IRAs let you contribute pre-tax dollars. 

The biggest disadvantage to saving in a Traditional or Roth IRA is the low contribution limit, and, if you make too much money, you can’t contribute at all to a Roth.


Additional Options for Retirement Savings

Health Savings Account (HSA)

As an entrepreneur, you may have to pay for your health insurance entirely on your own. If so, consider opening a health savings account (HSA). Though created for medical expenses rather than retirement, an HSA can function similarly to a retirement account for setting aside tax-deferred or tax-free money.


Tax-Deferred Annuities

Annuities offer another way to reach your retirement savings goal. Offered through insurance companies, annuities provide tax deferral as well as varied investment opportunities. 

The money you stash in an annuity grows tax-deferred, but becomes taxable once you withdraw money in retirement. In addition to tax deferral, annuities can provide a guaranteed income stream for a certain number of years or a lifetime.


The Bottom Line

To live Financially Well, it is important to start saving for retirement as soon as you begin earning income, even if you can’t afford to save much in the beginning. 

As your savings builds, it is recommended to get the help of a financial advisor to determine the best way to apportion your funds. Some companies even offer free or low-cost retirement planning advice to clients. Robo-advisors such as Betterment and Wealthfront provide automated planning and portfolio building as a low-cost alternative to human financial advisors. Be sure to pay attention to account fees. Even tiny changes in fees can have a huge impact on your nest egg over time.

* Disclaimer: Annual contribution limits and other limits change on an annual basis and exceptions apply.  As with any IRS regulation, there are exceptions to every rule.  This article does not cover every possible deduction or exception.  It is recommended that you seek the advice of a competent accountant and/or financial advisor.





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