American Dream

Taking Charge of Your Destiny: Understanding the Self-Employed Retirement Plan

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Being self-employed gives you a great deal of control over your destiny. Being your own boss, however, brings with it a wide host of responsibilities, among them the responsibility of providing your own retirement plan. Yet for the 10 million Americans who are their own boss, the need for a self-employed retirement plan is one of the most overlooked requirements for future financial security. In fact, according to TD Ameritrade, nearly 70 percent of the self-employed fail to contribute to a retirement fund on a regular basis, and 28 percent don’t save at all.

Besides providing a post-employment income, contributing to a retirement plan can lower your tax burden either through a reduced amount of taxable income or through tax deductions on your contributions.

“For entrepreneurs, there needs to be a balance between investing in the business today and investing in their future financial well-being,” says Lule Demmissie, managing director of retirement at TD Ameritrade. “When you’re self-employed, the temptation is to think that the business will grow enough that you won’t need to save today. But, you don’t know when the next payout is coming and you also don’t want to forfeit the power of tax-free compounded growth in vehicles like an IRA. Having a retirement plan in place with regular saving is doubly important.”

Solo 401(k)s

There are three main options for retirement funding for those who are self-employed, the first of which is a Solo 401(k). This option allows you to contribute up to 25 percent of your net earnings for self-employment in non-elective contributions and an additional $18,000 in elective contributions for 2015. Investors over the age of 50 can contribute an additional $6,000.

Solo 401(k)s allow for financial hardship or disability loans or withdrawals as well as regular withdrawals after age 59 ½.


The Simplified Employee Pension Individual Retirement Account (SEP IRA) is arguably the most flexible retirement option available for the self-employed individual. This option allows you to contribute up to 25 percent of your net income to the plan per year. The plan also allows for withdrawals at any time, though there’s a 10 percent penalty for those under age 59 ½.

Most attractively, the plan can be opened and funded up until your tax-filing deadline, making it an optimal last-minute solution. However, unlike the Solo 401(k), no option allows investors aged 50 and older to contribute more than the set limit.


The Savings Incentive Match Plan for Employees (SIMPLE IRA) is the best plan for self-employed individuals with fewer than 100 employees. The plan allows a maximum of $12,500 annually in contributions in 2015, as well as an additional $3,000 for individuals aged 50 or older. A 3 percent matching contribution is required if you have employees, and there’s an annual fee of approximately $25 per plan or $350, whichever is greater.

While contributing to a self-employed retirement plan may seem like a hassle, failing to do so could be detrimental to your long-term financial health. While regularly or automatically contributing to a retirement plan may be unattractive to those with unpredictable income, doing so can offer a level of financial security.

“We’ve seen correlations between people who get in the habit of automating their investing and arriving in retirement financially prepared,” says Demmissie. “Contributing small amounts regularly is often more fruitful than investing larger sums later on.”