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Whether you're a freelancer or your employer doesn't offer a retirement plan, saving for the future can easily slip through the cracks when you're handling it on your own. It may feel overwhelming to manage your own savings strategy, but the key is to understand your options and choose the best one for you. This will simplify the entire process and make it less intimidating.
For those working at companies that offer a 401(k), retirement savings is a straightforward process. Employers typically guide you through the steps and manage the administrative tasks. However, not everyone has access to this benefit. Some people are employed by smaller businesses that don’t offer retirement plans, while others may only work part-time and aren’t eligible for benefits. Self-employed individuals might also struggle to know where to begin.
However, not having employer-sponsored retirement benefits shouldn't mean you ignore your savings. In fact, it’s even more important to actively save since you won't benefit from an employer match. Below are some retirement plan alternatives for those without employer options.
Individual Retirement Accounts (IRA)
We've previously explored IRAs in detail. To summarize, IRAs are tax-advantaged accounts that come in two primary forms: Traditional and Roth. Roth IRAs allow you to withdraw your funds tax-free during retirement, while Traditional IRAs provide a tax deduction on your contributions from your taxable income.
Who is it suitable for? In general, IRAs are a great option for almost anyone. However, according to Nationwide, this is the preferred choice for individuals working for employers who do not offer a retirement plan.
What’s the contribution limit? The IRS states that for the years 2014 and 2015, the contribution limit is the lesser of:
$5,500 ($6,500 if you're 50 or older), or
your taxable compensation for the year.
Why choose it? If you’re seeking a simple way to save for retirement outside of a company-sponsored 401(k), or if you want to supplement any other retirement accounts you already have. For instance, many people who have 401(k)s also invest in IRAs, since it provides an additional savings opportunity once they've reached the contribution limit for their 401(k).
Why avoid it? If you already have another retirement account and you're not reaching its contribution limit, you may not feel the need to open an additional IRA.
For more details: Be sure to check out our comprehensive guide on IRAs.
SEP-IRAs
SEP-IRA stands for "Simplified Employee Pension Individual Retirement Account." It's a popular choice among self-employed individuals, according to The Money Book for Freelancers. With a SEP-IRA, you can save a substantial portion of your business’s income. (If you're self-employed, your "company" is essentially yourself.) It's simple to manage, according to Investopedia, and contributions are tax-deductible.
Who should use it? It's ideal for self-employed individuals and small business owners.
What’s the contribution limit? According to the IRS website, the contributions an employer can make to an employee's SEP-IRA are limited to the lesser of:
25% of the employee's compensation
$52,000 for 2014 ($53,000 for 2015)
If you're a self-employed freelancer, you're both the employer and the employee. So, if you’re fortunate enough to earn $100,000 as a freelancer, you can set aside $25,000 for yourself in one year and deduct that from your taxable income.
Why consider it? If you're a freelancer and want to save more than the $5,500 limit set for regular IRAs, the SEP-IRA provides a great option. It's easy to establish and doesn’t require extensive paperwork.
Additionally, if you're self-employed and have a few employees, and you’d like to provide them with a retirement benefit, the SEP-IRA offers a flexible solution with relatively few requirements.
Why avoid it? If you’re looking for a retirement plan with a higher contribution limit, the SEP-IRA might not be the right fit.
For further details: CNN Money provides an in-depth look at the SEP-IRA.
If you're using the SEP-IRA and have employees, it’s important to understand the contribution rules, even though they are flexible. Investopedia covers these rules in detail. Additionally, employees must meet certain requirements to qualify, and Good Financial Cents outlines these conditions.
Solo 401(k)s
Solo 401(k)s, also referred to as individual or self-employed 401(k)s, allow you to save a significant portion of your income. However, there are numerous guidelines, and the paperwork can be quite complex. For instance, when I spoke with Fidelity about Solo 401(k)s, they mentioned that the IRS mandates you to make "recurring" and "substantial" contributions, meaning less flexibility in how much and how often you can save.
Additionally, these accounts tend to carry higher fees, as noted in The Money Book.
Who is it suitable for? This plan is ideal for self-employed individuals and small business owners.
What’s the contribution limit? One of the main advantages of the Solo 401(k) is its high contribution limits. According to the IRS, you can contribute as both the employee and the employer. Here are the outlined limits:
Elective deferrals of up to 100% of your compensation ("earned income" for self-employed individuals), up to the annual contribution limit:
$17,500 for 2014 and $18,000 for 2015 (or $23,000 for 2014 and $24,000 for 2015 if you're 50 or older); plus
Employer non-elective contributions can go up to:
25% of compensation as defined by the plan, or
For self-employed individuals, refer to the
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Why choose it? You want to contribute even more than the limits set by an SEP-IRA.
Why avoid it? You don't want to deal with the administrative work and paperwork. According to Fidelity, unless you're aiming to save a large portion of your income, the SEP-IRA might be a simpler option for self-employed individuals.
For further details: Once again, CNN Money offers a comprehensive look at Solo 401(k)s.
SIMPLE IRAs
The SIMPLE IRA, or "Savings Incentive Match Plan for Employees," is a type of Traditional IRA that allows you to save for yourself and any employees you may have.
Who is it suitable for? This plan is ideal for small business owners or self-employed individuals who have employees and wish to contribute to their retirement savings.
What’s the contribution limit? According to the IRS, employees can contribute up to $12,000 in 2014 and $12,500 in 2015. As an employer, you're generally required to match up to 3% of your employee's contributions, dollar-for-dollar.
Why choose it? You have a small team and want to provide them with a retirement benefit.
Why avoid it? You’re a solo worker without employees, so it doesn’t apply to you.
For further details: Learn more about the IRS contribution rules here.
Taxable Brokerage Accounts
These are non-retirement investment accounts. They allow you to invest and take advantage of market returns, similar to retirement accounts. However, they don't offer tax benefits. This means that you cannot deduct your contributions, and you'll need to pay taxes on any income earned through dividends or capital gains.
Who should consider it? Anyone looking to save beyond their regular retirement accounts. Perhaps you’ve already reached the contribution limit for your Traditional or Roth IRA and need another option.
What’s the contribution limit? There is none. Since these accounts aren’t tax-advantaged, you can contribute as much as you want.
Why choose it? You're working, your employer doesn’t offer a retirement plan, and you’ve already hit the limit for your IRA contributions.
If your employer doesn’t offer a 401(k), your only tax-advantaged retirement savings options are typically a Traditional or Roth IRA, according to MintLife. Once you hit your IRA contribution limit and still want to save more, they suggest turning to a taxable brokerage account. While you'll face taxes, your returns will likely outperform a regular savings account.
Why avoid it? The primary downside is taxes. Experts usually advise maxing out your tax-advantaged accounts first. But if you’re determined to save beyond those limits, this could be an option. Alternatively, there are other savings vehicles, like CDs, to consider.
For further details: Take a look at our guide on how to begin investing in the stock market.
Once you determine which plan suits you best, you'll need to open an account at a brokerage or bank that supports that specific plan. You can call them for assistance to guide you through the setup and ensure you have all the required paperwork. After that, you simply contribute to the account and select your investments.
Managing your own retirement plan might seem daunting at first, and it can be a bit time-consuming from start to finish. But once you identify what you want and eliminate what you don’t need, the process becomes much easier.
