Retirement Savings Options For Solopreneurs Or Independent Contractors

If you are working for yourself, it can be difficult to decide how to save for retirement. Most people I meet understand the need for retirement savings. Social Security is not designed to replace your entire income and pensions have become rare over the years. This leaves a savings gap that many employees at companies opt to fill with a 401(k) plan.

Working for yourself, you don’t have a company making your retirement plan decisions for you. This opens a lot of options for retirement savings, which can lead to some paralysis by analysis. This article will discuss a few of the retirement savings options for solopreneurs and independent contractors and when they can be appropriate.

Simplified Employee Pension (SEP IRA)

A SEP IRA is a plan that allows you to save up to 25% of your Adjusted Gross Income (AGI) up to $66,000 into a pre-tax retirement account. This saves money on taxes today, but the invested amount is taxable upon distribution in retirement. SEPs are among the easiest employer-sponsored plans to administer because there are no testing requirements for solopreneurs and independent contractors.

Contribution timing is also extremely easy, allowing you to procrastinate on retirement contributions for one year up to your extended tax filing deadline of October 15^th the following year. You can even have a SEP and save in an outside employer-sponsored 401(k) concurrently.

A drawback for some is that if you do end up hiring someone long-term, you would need to add them to the plan and contribute an equal percentage on their behalf (if you contribute 10% of your income, you must contribute 10% of theirs as well). SEPs can be well-suited for people who like simplicity, might participate in an outside retirement plan as well, have variable or unpredictable income, wish to save pre-tax, want to minimize costs, and are unlikely to bring on long-term employees.

Solo 401(k)

That’s right, 401(k)s don’t have to just be for large companies. You can have as little as one person in a plan. As of 2023, you can contribute up to 100% of your earned income up to $22,500 ($30,000 if you are over 50). If you are a solopreneur, you also have the option to add a company match or profit share to bring your contribution total up to $66,000. In my opinion, the biggest advantage of a solo 401(k) is that you have the access to Roth savings without an income limit. Roth taxation allows you to save after-tax money, accumulate tax-deferred, and withdraw in retirement tax-free. In a hypothetical scenario, if you save $100,000 today and it grows to $1,000,000* by the time you are 59 ½, you would receive the full amount tax-free.

The drawback of a solo 401(k) is that once you exceed certain values, compliance reporting and filing the IRS form 5500 is required. Usually, this requires hiring an outside firm to ensure this is done correctly and in IRS compliance. This can make maintenance of the 401(k) more costly than some of the other options. You also cannot continue to contribute to a solo 401(k) if you bring on employees. If you did, the plan would need to be a 401(k) that can support employees.

Individual Retirement Accounts (IRA)

If you are just looking to set aside a small amount for retirement, a basic IRA can do the job. Contributions are limited to $7,500 per year for pre-tax traditional IRA and Roth IRA contributions. However, Roth IRA contributions are subject to income limitations, and the deductibility of pre-tax traditional IRA contributions can be limited by your income if you have access to an outside retirement account. Hiring employees does not limit your ability to save in an IRA because it is not an employer-sponsored plan. For high earners, a Traditional or Roth IRA may come with too many limitations to be able to meet a solopreneur or independent contractor’s savings goals.

Conclusion

In conclusion, there are a lot of options for retirement savings vehicles out there for solopreneurs and independent contractors. The important thing is choosing a retirement savings option and beginning to save and gain the benefits of compounding interest. You can always change vehicles down the road. If you need support in choosing the best plan and investments for your individual situation, consult a qualified tax advisor and financial professional.

* This hypothetical example is not indicative of the actual performance of any particular investment, insurance contract, or other financial product. This example does not take into account the impact of any market losses or applicable fees and expenses.

This informational and educational article does not offer or constitute, and should not be relied upon, as tax or financial advice. Your unique needs, goals and circumstances require the individualized attention of your own tax and financial professionals whose advice and services will prevail over any information provided in this article. Equitable Advisors, LLC and its associates and affiliates do not provide tax or legal advice or services.

Cicely Jones (CA Insurance Lic. #:0K81625) offers securities through Equitable Advisors, LLC (NY, NY 212-314-4600), member FINRA, SIPC (Equitable Financial Advisors in MI & TN) and offers annuity and insurance products through Equitable Network, LLC, which conducts business in California as Equitable Network Insurance Agency of California, LLC). Financial Professionals may transact business and/or respond to inquiries only in state(s) in which they are properly qualified. Any compensation that Ms. Jones may receive for the publication of this article is earned separate from, and entirely outside of her capacities with, Equitable Advisors, LLC and Equitable Network, LLC (Equitable Network Insurance Agency of California, LLC). AGE-5727620.1(06/23)(exp.06/25)