Retirement planning for self-employed individuals, entrepreneurs and freelancers

The best retirement plan for self-employed individuals depends on factors such as your income, age and retirement goals. However, two of the most popular and advantageous options are SEP IRAs and Solo 401(k)s.

A SEP (Simplified Employee Pension) IRA allows self-employed individuals to contribute up to 25% of their net earnings, with a maximum contribution limit of $69,000 for 2024. SEP IRAs offer high contribution limits, flexible annual contributions and tax-deferred growth, making them an attractive choice for those with high income or variable earnings.

Solo 401(k)s, also known as one-participant 401(k)s, are designed for self-employed individuals with no employees other than a spouse. These plans allow for even higher contributions than SEP IRAs, with the ability to make both employee and employer contributions. In 2024, the contribution limit for a Solo 401(k) is $23,000 for the employee, plus up to 25% of compensation for the employer. The total combined contribution limit for both the employee and employer cannot exceed $69,000, or $76,500 for those aged 50 or older.

In addition to SEP IRAs and Solo 401(k)s, there are several other retirement savings options available to self-employed individuals:

• SIMPLE IRA. Savings Incentive Match Plan for Employees (SIMPLE) IRAs are designed for small businesses with 100 or fewer employees. In 2024, you can contribute up to $16,000 ($19,500 if age 50 or older), with the option for employer matching contributions.
• Traditional and Roth IRAs. While not specifically designed for the self-employed, traditional and Roth IRAs can be used to supplement other retirement savings. In 2024, you can contribute up to $7,000 ($8,000 if age 50 or older) to either type of IRA, with the main difference being the tax treatment of contributions and withdrawals.
• Health savings account (HSA). If you have a high-deductible health plan, you can open an HSA to save for medical expenses in retirement. Contributions are tax-deductible, and funds grow tax-free if used for qualified medical expenses. For 2024, you can contribute up to $4,150 for individual coverage or $8,300 for family coverage, with an additional $1,000 catch-up contribution if age 55 or older.
• Taxable brokerage accounts. While not offering the same tax advantages as dedicated retirement accounts, taxable brokerage accounts can provide flexibility and additional savings opportunities. These accounts allow you to invest in a wide range of assets, such as stocks, bonds and mutual funds, and can be used to supplement your other retirement savings.

When planning for retirement as a self-employed individual, there are several key factors to consider:

• Start early. The earlier you begin saving for retirement, the more time your money has to grow through compound interest. Make retirement saving a priority from the start of your self-employment journey.
• Set clear goals. Determine how much you'll need to save for a comfortable retirement based on your desired lifestyle and estimated expenses. Use this target to guide your saving and investing strategies.
• Choose the right retirement accounts. Evaluate the various self-employed retirement plan options and select those that best fit your needs based on factors such as contribution limits, tax treatment and flexibility.
• Invest wisely. Develop a diversified investment strategy that aligns with your risk tolerance and retirement goals. Consider working with a financial professional to create a tailored investment plan.
• Plan for health care costs. Health care expenses can be a significant burden in retirement. Consider options like HSAs and long-term care insurance to help manage these costs.
• Create a succession plan. If you own a business, develop a succession plan to ensure a smooth transition and maximize the value of your business when you retire.

The amount a self-employed person should save for retirement depends on several factors, including their age, desired retirement lifestyle and estimated expenses. As a general rule of thumb, aim to save at least 15% of your income for retirement, although a higher percentage may be necessary if you start saving later in life or have more ambitious retirement goals.

To determine your specific retirement savings target, consider using the "4% rule." This rule suggests that you can withdraw 4% of your retirement savings each year without running out of money over a 30-year retirement. For example, if you estimate needing $50,000 per year in retirement, you would need to save $1.25 million ($50,000 ÷ 0.04) by the time you retire.

Keep in mind that these are general guidelines, and it's essential to create a personalized retirement plan based on your unique circumstances.

If your business fails, the impact on your retirement accounts depends on the type of account and your business structure:

• SEP IRA and Solo 401(k). If your business is a sole proprietorship, your SEP IRA or Solo 401(k) is treated as a personal asset and is protected from creditors in the event of business failure. However, if your business is structured as a corporation or LLC, your retirement accounts may be subject to creditor claims, depending on the specific circumstances and state laws.
• SIMPLE IRA and traditional/Roth IRAs. These accounts are always considered personal assets and are generally protected from creditors, regardless of your business structure.
• Taxable brokerage accounts. If your business is a sole proprietorship, taxable brokerage accounts are personal assets and are protected from creditors. However, if your business is a corporation or LLC, these accounts may be subject to creditor claims, depending on the specific circumstances and state laws.

To minimize the risk of losing your retirement savings due to business failure, consider working with a legal professional to structure your business in a way that provides maximum asset protection.

Retirement planning for the self-employed requires careful consideration and proactive strategizing. By understanding the various retirement savings options available, such as SEP IRAs, Solo 401(k)s, SIMPLE IRAs, traditional and Roth IRAs and HSAs, you can create a comprehensive plan that aligns with your unique needs and goals.

Remember to start saving early, set clear targets, invest wisely and plan for health care costs and business succession. By taking control of your retirement planning today, you can secure a financially stable future and enjoy the rewards of your hard work as a self-employed individual.