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Retirement Planning While Self-Employed: Choosing the Right Savings Plan

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Being your own boss offers a lot of flexibility and opportunity for financial growth, but saving for retirement when you're self-employed can be a difficult path to navigate.

Self-employed workers generally have many of the same retirement options, including saving on a tax-deferred basis, as employees. But many self-employed individuals don't take advantage of these options and fail to take an important first step: They often don't take the time to learn about the retirement savings options available to them and instead pay themselves first.

To help you avoid that trap, here is a look at four options that can be a part of a healthy self-employed retirement plan: traditional IRAs, Roth IRAs, SIMPLE IRAs and SEP plans.

Traditional IRAs

Anyone who has taxable income, including self-employed sole proprietors, can open and fund a traditional IRA as long as they haven't reached the age of 70 ½ by the end of the current tax year. Individuals can begin accessing the funds in their traditional IRA as early as age 59 ½, and at age 70 ½ they must start withdrawing a taxable amount from their account.

Roth IRAs

Unlike a traditional IRA, with a Roth IRA, you won't get an immediate tax deduction or reduce your gross income. Instead, self-employed individuals with a Roth IRA pay taxes on their annual contributions. This means that upon retirement, your withdrawals are not treated as taxable income. In addition, unlike with a traditional IRA, there's no required distribution when you turn 70 ½ with a Roth IRA.


A savings incentive match plan for employees, or SIMPLE IRA, is meant for both self-employed sole proprietors and small companies with fewer than 100 employees The SIMPLE IRA allows eligible employees to contribute part of their pre-tax compensation to the plan. This means the tax on your savings is deferred until the funds are distributed during retirement.

Because SIMPLE IRAs come with a special withdrawal penalty, it's important to consider whether you plan to withdraw money during the two-year period after you begin participation. If you withdraw early from a traditional IRA, there is a 10 percent penalty on top of taxes. However, with a SIMPLE IRA, it's up to 25 percent.

SEP plan

A simplified employee pension plan, or SEP plan, is a type of IRA for small business owners and self-employed individuals. A SEP plan provides business owners with a simplified method to contribute toward their employees' retirement savings as well as their own. Contributions are made to a SEP IRA set up for each plan participant.

What self-employed entrepreneurs may like about a SEP plan over a traditional IRA is the ability to contribute more on an annual basis. Individuals are allowed to contribute up to 25 percent of their net compensation as with a traditional IRA, money in a SEP plan is not taxable until it is withdrawn.

Regardless of which type of structure self-employed professionals choose, it's important to work with a financial professional who can help you create a retirement plan that works for your particular situation. Starting slowly and improving each of your financial plays a little bit at a time puts you in a powerful position — both on the chessboard and in your personal life.

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