Financial advice proves helpful for self-employed individuals planning for retirement

August 8, 2021

By Leslie Anderson, Contributing Writer

 Planning and saving for retirement falls completely on the shoulders of self-employed people.
Planning and saving for retirement falls completely on the shoulders of self-employed people. Photo/

REGION – Operating a successful business reflects long-held goals for many people. Working for oneself provides a certain satisfaction of offering a special product or service to happy customers. Plus, many entrepreneurs enjoy the experience of seeing something grow over the course of years or even decades.


The challenge 

On the other hand, one drawback is retirement planning. And as we age that planning becomes all the more important. The guesswork is taken out of the equation when you have a job that offers a pension or employer-sponsored 401(k) plan. However, retirement savings falls on the shoulders of the business owner when you are self-employed. Therefore, how does a small business owner or “solopreneur” plan for retirement? 

The good news is people in this situation have options that best fit their goals and current income status. Whether you do your own research or work with a financial planner, retirement planning is possible with any of the following options.


The Simple IRA

One choice the IRS offers is the Savings Incentive Match Plan for Employees or Simple IRA. In this plan, both employers and employees can contribute to a traditional IRA set up for employees. It is ideal for when a business has less than 100 employees and no other retirement plan in place. 

How this IRA works is quite simple (no pun intended). If the employee contributes to it, then the employer must match up to three percent of his or her annual pay. However, if the employee chooses not to contribute, then the employer matches up to two percent.

Generally, the employer has no requirements for filing, which makes this one of easiest plans to set up. He or she then chooses which financial institution to serve as trustee. Then he or she executes a written agreement with employees using the correct documents (Forms 5304 or 5305). 



Along similar lines, business owners can also opt for the Simplified Employee Pension (SEP) IRA. 

“There are a few things to consider, but generally speaking, a SEP IRA is a great way for self-employed individuals to save for retirement,” said Jon Wolff, a financial advisor with Raymond James Financial Services, which has numerous offices in Massachusetts. 

This choice also presents an easy-to-follow procedure for both a freelancer and a small business with employees. The owner contributes a maximum of $58,000 or 25 percent of the employee’s pay. For the solopreneur or independent contractor, 25 percent of his or her net earnings can go into the SEP. 

Set-up is quite easy with very little paperwork required. This plan tends to work best for freelancers or small businesses with very few employees. 


The Individual or Solo 401(k)

For the business owner who is looking to make larger contributions, the Individual 401(k) offers some advantages. This plan also works well for couples who jointly own a small company and are looking for tax-planning opportunities. Likewise, for the couple where one spouse is employed by another company, the Solo 401(k) provides tax savings when maxed out.

Compared to the SEP IRA’s 25 percent limit, the business owners can contribute up to one hundred percent of their  annual salary which allows for “catching up” if they are over age 50. Thus, when looking at retirement planning late in the game, this presents an ideal route.


The Defined Benefit Plan

When combined with a 401(k), the Defined Benefit Plan gives the owner the chance to maximize contributions by allotting funds to both plans. Just like the Individual 401(k), this plan benefits married couples if both spouses run the business. It also proves to be useful when one spouse is employed, and the other is an independent contractor.

Participants in the gig economy might find themselves better equipped to choose a plan under a financial advisor’s guidance. Otherwise, researching on their own through the IRS’s website or another source could prove to be fruitful. Nevertheless, an advisor already possesses the latest knowledge of account set-up and tax laws. Either way, planning for retirement for the self-employed can definitely become reality. And it’s never too early to start.




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