How Self-Employed Workers Can Save for Retirement

If you work for yourself, these options let you make tax-deductible contributions that grow tax-deferred until you take the money in retirement.

Retirement ahead
(Image credit: Getty Images/iStockphoto)

I’m a self-employed consultant. What type of retirement savings account would be best for me?

The two best options for most self-employed workers are a Simplified Employee Pension (SEP) and a solo 401(k). You can make tax-deductible contributions to either plan, and the money grows tax-deferred until you withdraw it in retirement (you usually have to pay a 10% penalty for withdrawals before age 59½).

1) SEPs: You still have until April 18, 2016, to open a SEP for 2015. You can make 2016 contributions to a SEP account now, although the maximum limits are calculated based on your self-employment income, so you will need to have an idea of how much you will earn for the year.

Subscribe to Kiplinger’s Personal Finance

Be a smarter, better informed investor.

Save up to 74%
https://cdn.mos.cms.futurecdn.net/flexiimages/xrd7fjmf8g1657008683.png

Sign up for Kiplinger’s Free E-Newsletters

Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.

Profit and prosper with the best of expert advice - straight to your e-mail.

Sign up

If you’re a sole proprietor, you can contribute up to 20% of your net self-employment income (business income minus half of your self-employment tax), with a maximum SEP contribution of $53,000 for 2015. The contribution limit is the same for 2016.

2) Solo 401(k)s: You needed to open a solo 401(k) account by December 31 for 2015, but you have until April 18, 2016, to make 2015 contributions. You can make 2016 contributions to a solo 401(k) account now, although, again, the maximum limits are calculated based on your self-employment income, so you will need to have an idea of how much you will earn for the year.

You may be able to contribute more to a solo 401(k) than to a SEP--up to $18,000 for 2015 or 2016 (or $24,000 if you’re 50 or older anytime during the year), plus up to 20% of your net self-employment income, with a total solo 401(k) contribution of $53,000 (or $59,000 if you’re age 50 or older). Your total contributions cannot exceed your self-employment income for the year.

Some solo 401(k)s give you the option to make Roth contributions, which are not tax-deductible now but can be withdrawn tax-free after age 59½ (see Get Tax-Free Retirement Income via a Roth Solo 401(k) for the rules, which are a bit tricky).

Kimberly Lankford
Contributing Editor, Kiplinger's Personal Finance

As the "Ask Kim" columnist for Kiplinger's Personal Finance, Lankford receives hundreds of personal finance questions from readers every month. She is the author of Rescue Your Financial Life (McGraw-Hill, 2003), The Insurance Maze: How You Can Save Money on Insurance -- and Still Get the Coverage You Need (Kaplan, 2006), Kiplinger's Ask Kim for Money Smart Solutions (Kaplan, 2007) and The Kiplinger/BBB Personal Finance Guide for Military Families. She is frequently featured as a financial expert on television and radio, including NBC's Today Show, CNN, CNBC and National Public Radio.