6 Ways to Save for Retirement if You're Self-Employed

Self-employment gives you a lot of freedom. You can set your own hours, choose your own salary, and pick the retirement account that best suits you. The downside? You probably don't have anyone to help you figure out which retirement account you should pick.

Fortunately, you do have options, and once you understand the benefits and limitations of each, you should be able to pinpoint the one that's right for you and your company. Here are six to consider.

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Traditional IRAs are open to anyone earning income for the year, even those who are not self-employed. So even if you end up going back to a traditional job later, you can still contribute to one of these.

Money you put in a traditional IRA reduces your taxable income for the year, which can save you money on your taxes now. Tax-deferred accounts like these are usually the way to go if you believe you're in a higher tax bracket now than you'll be in once you retire.

You're only allowed to contribute up to $6,000 to a traditional IRA in 2022 or $7,000 if you're 50 or older. This is much lower than what many of the other self-employed retirement accounts listed here enable you to contribute. So you may have to choose an alternate retirement account to use after you've maxed out your traditional IRA.

A Roth IRA is similar in many ways to a traditional IRA. Both give you a lot of freedom in what you invest in and both are open to traditionally employed and self-employed people.

But instead of getting a tax break today, Roth IRAs offer tax-free retirement withdrawals. You must pay taxes on your contributions up front, but this is usually the better play for those who think they're in the same or a lower tax bracket than they will be when they retire.

Roth IRAs are subject to the same contribution limits as the traditional IRA discussed in a previous slide. But there are some additional rules for higher earners. If you earn over a certain amount based on your tax filing status, you may not be allowed to contribute any money to a Roth IRA directly.

However, there is a way around this. If you put the funds in a traditional IRA and do a Roth IRA conversion in the same year, you effectively achieve the same end result. It just requires a few extra steps.

READ ALSO: Roth IRA Income Limits for 2021 and 2022

SEP IRAs, or simplified employee pension individual retirement accounts, are a great option for business owners hoping to set aside larger sums for retirement. They're similar to the traditional and Roth IRAs discussed previously, but they allow for much higher contribution limits.

In 2022, you can contribute up to the lesser of $61,000 or 25% of your net self-employment income. Your net self-employment income is your net profit minus your SEP IRA contributions and half the self-employment taxes you paid during the year.

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A SEP IRA isn't a great choice for those with employees because it requires employers to make mandatory contributions to their employees' accounts. For example, if you contribute 15% of your income to your SEP IRA, you must also contribute 15% of each of your employees' salaries to their SEP IRA.

Another drawback is that there's no Roth version of a SEP IRA. You have to pay your taxes in retirement. That might not be an issue for you, but if you prefer a Roth account, a SEP IRA might not be the right choice for you.

A SIMPLE IRA is a better option for business owners with employees. It also allows for higher contributions than regular IRAs. You may contribute up to $14,000 to a SIMPLE IRA in 2022 or $17,000 if you're 50 or older.

SIMPLE IRAs also require employer contributions to employee accounts, but you don't have to contribute as much as you would with a SEP IRA and contributions to employee accounts are tax deductible. You can either do a 2% nonmatching contribution to all employees' accounts, regardless of if they contribute themselves, or you can do a 3% matching contribution.

SIMPLE IRAs are always tax deferred, meaning there's no Roth option if you prefer to pay taxes on your savings up front.

The mandatory contributions to employees' accounts can also affect how much extra cash you have left to set aside for yourself. It's possible to reduce employer contributions temporarily, but you can't do this in more than two years out of five.

ALSO READ: SIMPLE IRA Rules

A solo 401(k) is another option for those with no employees. It enables you to contribute up to $61,000 ($67,500 if 50-plus) in 2022. This is great news for those hoping to set aside large sums for retirement each year.

Married couples who both work for the business can each set aside up to the limits above, so a couple could save up to $122,000 this year, if they earned enough through their business.

A solo 401(k) won't be an option for you if you have any employees other than your spouse. It also doesn't allow for Roth contributions. All the funds you put in this account are tax deferred, so you'll owe taxes on your earnings and contributions in retirement.

If you open a solo 401(k), you'll also have to get comfortable filing paperwork with the IRS every year once your account balance exceeds $250,000. If both spouses have their own solo 401(k)s with more than $250,000 in each, they must file separate paperwork for each account.

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Health savings accounts (HSAs) aren't technically retirement accounts, but they offer many similar benefits. Contributions to your HSA reduce your taxable income for the year, and as an added bonus, the government never taxes money you spend on medical care.

You can also make nonmedical withdrawals, but you'll owe taxes on these plus a 20% penalty if you're under 65. But once you hit this age, it's more or less like a traditional IRA with a few extra perks. These include tax-free medical withdrawals and no required minimum distributions when you turn 72.

HSAs are only open to those with high-deductible health insurance plans. That's one with a deductible of $1,400 or more for an individual plan in 2022 or $2,800 or more for a family plan. If you qualify, you may contribute up to $3,650 if you have an individual plan or $7,300 if you have a family plan. These limits are lower than most of the other accounts listed here.

While investing your HSA funds is possible, not all HSA providers allow this. If you're planning to stash some of your retirement savings here, make sure you look for one that enables you to invest your money so it grows more quickly.

ALSO READ: 15 Things You Need to Know About Health Savings Accounts

No retirement account is perfect. But hopefully now you have a better grasp on which ones you may want to look into a little further. Explore a few of the options discussed here and decide which makes the most sense for you right now. You can always change your mind down the road if you decide a different account would suit you better.

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