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Best Retirement Savings Plans for the Self-Employed

When you first start working, you probably hear a lot about 401ks and IRAs.

But as the saying goes — “but wait! there’s more!”

More, that is, for self-employed individuals.

For those with businesses and not standard W-2 style employment, there exists a veritable cornucopia of retirement account options, from the simple IRA to the complex cash balance plan.>Our friend, the White Coat Investor, surveys these options to help you narrow down your choice of self-employed retirement savings vehicles.


Just because you are self-employed doesn’t mean you don’t have options to save for retirement. Here’s a rundown of the best retirement options for self-employed workers.


Retirement Accounts for the Self-Employed

There are many advantages to being self-employed when it comes to saving for retirement. As an independent contractor (i.e., paid on a 1099 instead of a W-2), you are considered to be running your own business. Just like your employer gets to pick the benefits it offers, you now get to choose (and pay for) your own benefits. While the self-employed miss out on a 401(k) match from an employer, you are also no longer limited by the employer’s contribution limits, plan fees, or often poor investment options.


Retirement Options for Self-Employed


Independent Contractor 401(k) 

The mainstay of retirement saving for the self-employed should be an individual 401(k), sometimes called a solo 401(k). In 2022, these plans allow you to make a $20,500 “employee” contribution ($27,000 if older than age 50) and then make “employer” contributions of 20% of your net income up to the plan contribution limit of $61,000.

While you only get one employee contribution no matter how many jobs or 401(k)s you have, the $61,000 limit is a per-plan limit. That means if you have an employee job with a 401(k) and do some work as an independent contractor, you can still open an individual 401(k) and just contribute the employer contribution to it.


Where Can I Open a Solo 401(k) Account?

Solid individual 401(k) plans can be easily opened at any of the large mutual fund or brokerage companies such as Vanguard, Fidelity, Charles Schwab, eTrade, or TD Ameritrade. While all of these plans are good plans with diversified, low-cost investments available, some plans offer features that others do not.


How to Set Up a Solo 401(k) and What Plan Features Should You Look For?

Be sure the individual 401(k) plan you choose has the features that are important to you, such as Roth contributions, IRA rollovers, or 401(k) loans. For example, some might not offer a Roth option while others do. If a 401(k) loan is important to you, Fidelity, Schwab, and Vanguard don’t allow them with their plans, but it is an option with eTrade.

You will also need to get an Employee Identification Number from the IRS to open an individual 401(k), but this is free and only takes a few minutes online. You do not need to form an LLC or corporation to use an individual 401(k). By virtue of receiving a 1099, you are automatically a sole proprietor, and that is enough to start a plan.

If you are interested in investing in real estate or other non-publicly traded investments, consider a self-directed 401(k).


Self-Employed SEP-IRA

Some doctors, and even their accountants, consider using the slightly simpler SEP IRA instead, which has the same $61,000 total contribution limit. However, thanks to the employee contribution feature of an individual 401(k), you can hit the maximum contribution of $61,000 with a much lower income. In addition, using the i401(k) instead of a SEP IRA allows you to do a Backdoor Roth IRA since the balance of a SEP IRA is included in the required pro-rata calculation (explained below). Talance of an i401(k) is not.


Backdoor Roth IRA

Whether you are employed or self-employed, you can also contribute to a personal Backdoor (indirect) Roth IRA and—if you’re married with sufficient income—a spousal Backdoor Roth IRA. These became permitted in 2010 when Congress began allowing high earners to do Roth conversions. Instead of a direct Roth IRA contribution, you first contribute to a traditional IRA, which is not deductible due to your high income, and then move that money to a Roth IRA.

self employed retirement plans

There are still plenty of great retirement savings options if you are riding solo.

Since you never received a deduction, there is no tax cost for the conversion, and the end effect is the same as if you had contributed directly to a Roth IRA. Annual Roth IRA contribution limits for 2022 are $6,000 if younger than age 50 and $7,000 if older than age 50.

Be aware that due to the pro-rata rule, the conversion is only tax-free if you have no balance in a SEP IRA, a SIMPLE IRA, or a traditional IRA on Dec. 31 of the year of the conversion. If you do have one of those accounts, you may wish to roll it into a 401(k), such as your new individual 401(k), to facilitate future Backdoor Roth IRAs.

Like with a self-directed, individual 401(k), you can also have a self-directed Roth IRA and invest in real estate or similar private investments. Just keep in mind that if your investment is leveraged, you will be subject to Unrelated Business Income Tax in a self-directed IRA (but not a self-directed 401(k)).


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Health Savings Account (HSA)

A health savings account (HSA) can also function as a stealth IRA, and it’s an excellent account to use for retirement savings. Not only does it give you an upfront tax break and tax-protected growth like a 401(k), it also provides for tax-free withdrawals if the money is used for healthcare. This makes it the most tax-advantaged account available to the investor.

These funds can be invested in mutual funds like a typical retirement account. The contribution limit for 2022 is $3,650 for individuals and $7,300 for families. If you end up not needing it for healthcare, you can withdraw the money penalty-free after age 65. However, you would need to pay taxes on that withdrawal, just like a 401(k).


Defined Benefit/Cash Balance Plan for Individual Contractors

Another option for independent contractors, although more rarely used, is a personal defined benefit/cash balance plan. This retirement account is best thought of as an extra IRA masquerading as a pension. It has higher expenses than an individual 401(k) due to a requirement for annual actuarial calculations, and it typically is not invested as aggressively.

However, the contribution limits can be quite high, particularly for physicians in their 50s or 60s. It is an option worth exploring for someone interested in saving large amounts for retirement.


Taxable Brokerage Account

Investing in a nonqualified, taxable brokerage or mutual fund account for retirement is also an option. While the tax and asset protection benefits are much more limited, the additional flexibility can be a useful feature.

Alternative investments, such as real estate, are also much easier to invest in outside of retirement accounts, and equity real estate can provide income that is tax-free—at least for a few years—thanks to depreciation.


Self-Employed Retirement Savings Options Summary

As you can see, an independent contractor has plenty of excellent options to use for retirement savings. While the main pillar should be an individual 401(k), remember that a Roth IRA, HSA, cash balance plan, and taxable account provides additional options.



Are you self-employed? Which retirement accounts have you used to save for retirement? Comment below!


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1 thought on “Best Retirement Savings Plans for the Self-Employed”

  1. The solo 401(k) employer match is allowed up to 25%


    My husband and I are both self employed working for our own business. I know the general wisdom is to “pay yourself first “ and contribute as you go along, but FWIW, I tend to hold on to the cash as a sort of “business emergency fund”, throughout the year then contribute as much as I feel we safely can at the end of each year.

    We have an S Corp so our clients pay the business and we then pay ourselves through payroll, with employer and employee taxes taken out.
    – The solo 401(k) can be used for both spouses when you both work for the family business. You each get that huge allowance. Sweet!

    – Let’s say our business pays us each $10k per month pre tax, so $20k total .

    – Every month I move money out of the business checking into the business savings account in our regular bank: $5k (25% of $20k) + $2k me +$2k him(rough rough rounding up 1/12 of the allowed employee contribution). So $9k per month starts adding up in the savings account.

    – In November, if no big emergency came along to eat the funds, I use the money in the savings account to send $60k into the 401(k) fund: $30k for each of us as a 25% match on our $120k annual salary.

    – In December, if there is still no emergency, I run a one-time payroll to pay each of us the additional personal allowance of $20,500 or $27,000 depending on our age. Then I send that payment in also.

    This example does not get either of us up to the maximum of $61k but it does keep the math simple.

    Why don’t I take the time-based advantage of getting money into the fund as we go along? Because it is a small family business and “things” can happen. Sometimes clients don’t pay or we lose a contract and sometimes there are family emergencies that cause one or both of us to stop earning for a few weeks. I’d love it if the business income was big enough and stable enough to contribute the full allowance as we went through the year. But that is still an aspiration not a reality.


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