Best Ways for the Self-Employed to Save for Retirement

If you work for yourself, the two best choices are a solo 401(k) and a simplified employee pension.

401k SEP
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By Kimberly Lankford

I'm self-employed and want to set up a retirement-savings account. Which type of account should I open? What's the deadline for 2013?

Two of the best retirement-savings options for self-employed people are a solo 401(k) and a simplified employee pension, or SEP. Contributions to either type of account are tax-deductible and grow tax-deferred until you tap the money in retirement.

The deadline depends on the type of account you choose. You must set up a solo 401(k) by Dec. 31, if you don't already have an account, but then you have until April 15, to make your 2013 contributions. You have until April 15, to open a SEP account and make your 2013 contributions.

In a solo 401(k), you can contribute up to $17,500 plus up to 20 percent of your net self-employment income (business income minus half of your self-employment tax),
for a maximum contribution of $51,000 for 2013. Your total contributions cannot exceed your self-employment income for the year. If you're 50 or older in 2013, you can make catch-up contributions to a solo 401(k) of up to $5,500, for a maximum contribution of $56,500. Some solo 401(k)s also let you take out loans.

The maximum contribution for a SEP is the same as for a solo 401(k) -- $51,000 for 2013 -- but you are limited to contributing up to 20 percent of your net self-employment income. SEPs are usually easier to set up. You can open one at most brokerage firms, mutual fund companies or banks that offer IRAs, and you can usually invest in any mutual funds, stocks, bonds or other investments available in the firm's IRAs. You can't take loans from a SEP account.

Most people can set aside more money in a solo 401(k) plan than in a SEP. Say, for example, you earn $15,000 in net self-employment income from a freelance job for the year. You can contribute the full $15,000 to a solo 401(k), but you can only contribute $3,000 to a SEP (20 percent of $15,000).

You need to be careful with solo 401(k) limits if you have a 401(k) through an employer and also have some freelance earnings. In that case, your total employee deferrals to your employer's plan and your solo 401(k) are limited to $17,500 for the year. But you can still contribute up to 20 percent of your net self-employment income to a solo 401(k).

For a list of solo 401(k) plan administrators, see the vendor list. When choosing the administrator, compare the investment choices and fees. Fidelity, Schwab (SCHW) and TD Ameritrade (AMTD), for example, have no set-up or maintenance fees and let people choose most investments that are available to brokerage customers.

For more information about your options, see IRS Publication 560, Retirement Plans for Small Business.

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Melissa Li

The best advice for building retirement that I was ever given are:
1) Don't spend more than you make. You should try very hard to only borrow money for a home. Everything else should be paid off monthly.
2) Retirement is not a matter of Age. It is a matter of lifestyle. If you don't mind living on the street you can retire at any age. Plan your retirement based on the lifestyle you want to maintain.
3) If you can accomplish #1, then you will be able to save some money each year. l did not start seriously saving until I was in my 40's. Why? Children. As long as they are home, they will consume every extra nickel you can lay your hands on. Try to start as soon as possible.
4) When you buy your car, buy used, buy durable, and do your research. Pay for the car in full. Get a cheap, yet solid insurance policy (Insurance Panda has them for $25/month… woohoo!). Don’t buy a gas guzzler or a car that needs repairs all the time.
5) When you buy your home, buy the worst property in the best neighborhood that you can afford. And be willing to sell within 5-7 years if possible. (This also applies to your job. Most people get their biggest raises when they change jobs; about every 3-5 years).
6) When you can save, your target should be 50%. Don't expect to ever achieve that, but try. The average person cannot save over 10% of their income. The ones that can are much better prepared for retirement. This should be possible. Your maximum pay (value) will occur between the ages of 35 - 55. Every time you get a raise, increase your savings and don't change your lifestyle.
7) When you invest, try to get a guaranteed return of about 20% on your money. You will not find this very easily, but it's possible. The most profitable is Income Property, Small Business Partnership and others. Run the numbers to ensure that if you invest $500, you get at least $100 back each year after expenses. Sounds difficult. And it is. But, it can be done.
8) Don't loan or borrow money without a Contract. You can draw this up yourself. And don't loan or borrow money from relatives. (At least not until you are able to lend).
There is plenty of other good advice, but it's like dieting. It's a lifestyle change that involves years of diligent management.
Good luck!

May 26 2014 at 2:13 PM Report abuse rate up rate down Reply
Robert & Lisa

With our government nearly 20 trillion in debt, the question is not if but when runaway inflation will destroy our savings.

December 22 2013 at 6:15 AM Report abuse rate up rate down Reply
Robert & Lisa

Why save when Obama will take it away from you?

December 22 2013 at 6:13 AM Report abuse rate up rate down Reply