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Jar with a label saying retirement fund - Saving for Retirement When Self-Employed

Leaving the stability of a 9 to 5 job behind in order to go into business for yourself takes a certain amount of determination, patience and courage. Owning a business or freelancing full-time offers more flexibility and control over your career but it also means missing out on certain perks including saving for retirement using your employer’s plan. When you’re self-employed, the options for building your nest egg are a little different. If you currently work for yourself or you’re thinking of striking out on your own, here’s a rundown of the different ways to save for your future.

Related: How Much Do I Need to Save for Retirement?

Traditional or Roth IRA

Socking away money in a traditional or Roth IRA is one of the easiest ways to get the retirement ball going when you’re self-employed. There are also certain tax benefits that go along with each type of account, which can really help out if you’re paying a lot in self-employment tax.

With a traditional IRA, your contributions are tax-deductible so anything you chip in can be used to reduce your taxable income. The downside is that you’ll have to pay taxes on the money once you start making qualified withdrawals. You may also have to meet certain income guidelines to claim a deduction. For 2014, single filers could deduct up to the contribution limit, regardless of income. Married couples who file jointly when one spouse is covered by an employer’s plan could only claim the full deduction if their adjusted gross income was $181,000 or less.

Contributing to a Roth IRA won’t snag you a tax deduction but you’ll still get a break when it’s time to pull cash out of your account. Anything you put in grows on a tax-deferred basis and withdrawals of contributions are tax-free once the account’s been open for five years. Once you reach age 59 1/2, you can start withdrawing earnings on a tax-free basis as well.

Income also plays a part in determining whether you can contribute to a Roth IRA. For 2014, single filers could put in the max contribution if they earned less than $114,000. The limit increases to $181,000 for married couples filing jointly. If you’re married but file separately, you can only contribute to a Roth if your income is less than $10,000. The contribution limit for either type of IRA is $5,500 ($6,500 if you’re over age 50).

SEP IRA

A Simplified Employee Pension (or SEP IRA) is another savings vehicle that’s available to small business owners, freelancers and independent contractors. The advantage of a SEP IRA versus a traditional or Roth IRA is that the annual contribution limits are much higher, making it easier to fast track your retirement savings. For 2014, you could squirrel away up to 25% of your income in your SEP or $52,000, whichever is less. There are no catch-up contributions allowed for this type of plan.

Contributions to a SEP IRA are tax-deductible but the amount you can deduct depends on your income if you’re self-employed. If you think you may hire employees in the future you can set up your SEP plan to allow for contributions on their behalf, which would also be considered a tax-deductible business expense.

Solo 401(k)

A Solo or Individual 401(k) works like a regular 401(k) plan without the advantage of the company match. For 2014, self-employed workers could save up to $17,500 in a solo 401(k) or up to $23,000 if they’re over 50. The maximum annual contribution limit is $52,000, the same as a SEP IRA. Keep in mind that your total contributions can’t be more than your net self-employment income for the year.

The money you put into a solo 401(k) grows tax-deferred and your contributions are deductible. You won’t pay any taxes on earnings until you begin making qualified withdrawals. If you withdraw any cash before age 59 1/2, you’ll have to pay taxes on the distribution along with a ten percent early withdrawal penalty. Once you hit age 70 1/2, you’ll have to take required minimum distributions each year.

Saving for retirement is hard enough, even when you have the option of participating in an employer’s plan. When you’re trying to build a steady income from self-employment it can seem impossible. Educating yourself about what your options are can make it easier to come up with a solid savings plan.

Photo Credit: kokomolodge

Rebecca Lake Rebecca Lake is a retirement, investing and estate planning expert who has been writing about personal finance for a decade. Her expertise in the finance niche also extends to home buying, credit cards, banking and small business. She's worked directly with several major financial and insurance brands, including Citibank, Discover and AIG and her writing has appeared online at U.S. News and World Report, CreditCards.com and Investopedia. Rebecca is a graduate of the University of South Carolina and she also attended Charleston Southern University as a graduate student. Originally from central Virginia, she now lives on the North Carolina coast along with her two children.
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