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Retirement planning

Retirement for self-employed people: What to know & where to start

Woman standing by table working from home
Woman standing by table working from home
Maskot/Getty Images/Maskot

Millions of Americans are self-employed— 16 million to be exact —working gigs and operating small businesses from rented offices, self-made storefronts and establishments, repurposed spaces in their homes, or even entirely on the go. And while being your own boss can be a thrilling and fulfilling career path, that doesn't mean you won't run into stressors. Selecting and maintaining a retirement plan, for example, becomes entirely your own responsibility. This can feel a bit daunting.

The good news is that plenty of options exist when it comes to retirement for self-employed people and small-business owners. You may want to sit down with a financial advisor who will work with you to determine the right plan for you and your financial goals.

Common retirement plans for the self-employed

If you're reluctant to venture out on your own because you don't want to give up a stable, employer-sponsored retirement fund, there are sensible options out there for those with different work/life values. Here is an overview of a few great plans to choose from if you're self-employed.

SEP IRA

A simplified employee pension (SEP) IRA is a retirement plan for solo entrepreneurs or business owners with a few employees. This plan is funded by employer contributions to all employees who meet these eligibility requirements: ages 21 and older and must have worked for the employer for at least three of the last five years.

The IRS also sets the following employer-based  contribution rules for SEP IRAs:

  • As an employer, you may contribute up to 25% of each employee's annual salary.
  • Additionally, you can contribute 20% of net earnings from self-employment for your own account.
  • No catch-up contributions are allowed.
  • You don't have to contribute to your plan each year. If, however, you do contribute to your plan and have employees, you must contribute the same percentage to their plans as you do your own.

Bottom line: SEP IRAs are a more attractive option for solo business owners or those with very few employees because matching contributions can add up.

SIMPLE IRA

A savings incentive match plan for employees (SIMPLE) IRA is an option for self-employed business owners with 100 or fewer employees. The employees must have earned at least $5,000 in the previous two years. This option offers some of the simplicity and ease of setup found in IRAs.

As with other IRAs, pre-tax contributions to your plan are tax-deferred, and RMDs kick in once you hit age 72. And, as the employer, you can deduct contributions to your employee's retirement accounts as a business expense.

Here are the  2022 IRS contribution limits for a SIMPLE IRA:

  • Employees can contribute a maximum of $14,000.
  • Employees over 50 can add catch-up contributions of up to $3,000.
  • Employers are required to make contributions to employee accounts—either a 3% match of each participating employee's salary or a 2% flat fee to all employees' income, whether they contribute or not.

Bottom line: A SIMPLE IRA is a good option for larger small businesses with multiple employees that don't want the administrative burden of a traditional 401(k).

Solo 401(k)

If you've been employed at a job that offers a 401(k) option, you likely know the basics of how they work. A solo 401(k) is similar. Contributions are tax-deferred, and there are no age or income restrictions. However, a solo 401(k) is limited to business owners with no employees with one exception—if you're married and you and your spouse both work for the business, then you can both contribute to the plan based upon each of your compensations.

A unique and appealing feature of a solo 401(k) is you can contribute to it twice, once as an employee and then as the business owner. The allowable maximum contributions per the IRS change each year;  here are limits for 2022:

  • As an employee, your maximum contribution can go up to $20,500. If you're age 50 or older, you can put in additional catch-up contributions up to $6,500, for a total of $27,000.
  • As an employer, you can contribute up to 25% of your compensation.
  • If your business is a sole proprietorship or partnership your maximum employee contribution is 20% net your income (not including salary deferral.)
  • The total of both (excluding the additional $6,500 catch-up contributions if you're 50 or older) cannot be more than $61,000.

Bottom line: Solo 401(k)s are a great option for a self-employed person with no employees who can afford to make significant contributions to their plan.

Traditional or Roth IRA

An IRA, or  individual retirement account, is one of the easiest ways a self-employed individual can begin saving for retirement. There are limited eligibility requirements to open an account, and they are easy to open. Most financial service institutions offer these plans. However, something to keep in mind is that for many small business owners, employer-sponsored retirement plans offer more flexibility in the total contribution amount, so those may be better options.

There are two types of IRAs to choose from:

Traditional IRA.

With this option, your pre-tax contributions are tax-deferred, meaning you will pay taxes on the full distribution when you withdraw funds. Traditional IRAs also have a  required minimum distribution  (RMD) that kicks in when you turn 72 years old.

Roth IRA.

A Roth IRA allows you to make after-tax contributions, so when you take out your money in retirement, it's tax-free.1 However, Roth IRAs have income limits for eligibility that  do change each year. So, if you make too much, you may not be able to open an account.

The IRS sets  contribution limits on IRA accounts. If you are under 50, the 2022 contribution limit is $6,000 total for any traditional and Roth IRA accounts you have. For those over 50, the IRS allows up to $7,000 total, giving some room for catch-up contributions.

Bottom line: IRAs might be a good option for a solo, self-employed business owner who wants to start saving but doesn't have a lot of cash on hand.

Saving strategically for retirement

Regardless of what retirement plan you choose, a solid budget is the foundation of every retirement plan. Prioritize your future by paying yourself first, as they say, with a consistent line item in your budget for a retirement fund contribution. Intentionally carve out a piece of your monthly income or profit for retirement, and maintain that contribution as consistently as possible

Along with contributing as much and as frequently as you can, you should also safeguard your retirement savings. As a self-employed person or small-business owner, you should consider having a handful of other protections and services in place to ensure you don't force an early withdrawal or otherwise damage your nest egg:

  • Get business insurance. An accident in your workplace or a lawsuit could cause severe financial strain for your company (and potentially your savings). Business liability insurance can help protect you from costly settlements that you would be otherwise financially responsible for.
  • Consider a healthcare savings account (HSA).  An HSA is a helpful tool  if you have a high-deductible health plan. You might consider setting up an HSA to cover out-of-pocket healthcare expenses so you don't have to dip into your retirement savings if an unexpected health emergency arises.

Working with a financial advisor to walk through these important small business necessities—including a more in-depth look at retirement for self-employed individuals—can help you fully understand their impacts on your life, business, and future.  Contact one of our financial advisors  today to get started.

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Distributions of earnings are tax free as long as your Roth IRA is at least five years old and one of the following requirements is met: (1) you are at least age 59½; (2) you are disabled; (3) you are purchasing your first home ($10,000 lifetime maximum); or (4) the money is being paid to a beneficiary.

Thrivent and its financial advisors and professionals do not provide legal, accounting or tax advice. Consult your attorney or tax professional.
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