Self-employed Millennials know that there are lots of perks to being your own boss. You can make your own hours, set your dress code and decide where and when you will work. But the down stroke is that you don’t get some of the benefits of a typical workplace such as health care, insurance or, for the purposes of this blog post, a retirement savings plan. While this benefit might not be readily available, you should still be saving for financial independence in some way (assuming you can afford to of course).
You may love working non-stop right now (because, let’s be real, most of us are indeed #hustling all day), but at some point you may want to cut back on work to, well, enjoy. You may not feel confident about your retirement savings now, but there are some things you can do if you’re self-employed to save for your financial future. Moreover, you may actually need to save more because you don’t get the benefit of a company matching contribution that a lot of people get through their workplace. Below are some common types of retirement savings plans for those that are self-employed.
- Traditional or Roth Individual Retirement Account (IRA)
Contribution Limit: $5,500/year ($6,500 for those over 50) for 2017
Contribution Deadline: Tax filing deadline (usually April 15th)
Both the Traditional and Roth IRAs are a common starting place for many people to save for retirement outside of workplace provided plans. With a traditional IRA, contributions are made pre-tax and Roth contributions are made after-tax. These accounts are generally easy to open and maintain and may cost less than more complicated plans to run.
- SEP IRA
Contribution Limit: lesser of 25% of W-2 pay or $54,000 for 2017
Contribution Deadline: Tax filing deadline plus extension if applicable
A SEP IRA allows you to contribute much more to retirement savings than an IRA if you have enough income. The formula can be a little more complicated for figuring out a contribution limit, but a good accountant can help with that piece. The deadline for contributions also means that you can put some money in during the current year and then work with your accountant come tax time to see if you can add more before filing taxes for that year. It’s helpful to have the flexibility if your business is one that has sporadic income. That one big job that comes through at the end of the year can change things quickly.
- Solo 401(k) or Individual 401(K)
Contribution Limit: $18,000 as “employee” and an additional 25% of compensation as “employer”. Total maximum of $54,000
Contribution Deadline: “Employee” contributions must be done by the 15th of the month following deferral and “employer” contributions by tax filing date plus extension if applicable
The Individual 401(k) is one of the more robust ways to save for retirement as a self-employed person. It has a higher contribution cap based on income than the SEP IRA. It may be a little more difficult to establish and may cost a little more but the higher contribution limits may be worth it for some people. It does need to be established by December 31st of the year for which contributions will be made so you can’t open one for the prior year come tax time if you decided you can put away more money.
These are just a broad overview of the options that may be available to you as a self-employed hustler. My usual word of caution applies here to make sure to do your research or talk with a professional who can guide you through the choices. You are putting so much work into your business, make sure you are also taking care of yourself and your future outside of work.
Related Articles
[Financial Times] Self Employed? Here’s How to Save for Retirement
[Wall Street Journal] How to Transition into the Gig Economy
[CNBC] How to Juggle the Financial Ins and Outs of Freelance Work