Advertisement
savings

Retirement Plans for Self-Employed Workers

Even freelancers doing work on the side can contribute to a solo 401(k) or a Simplifed Employee Pension.

I started doing freelance work a few months ago and am wondering if I can contribute to a self-employed retirement account. If so, can I contribute to a Roth IRA at the same time?

Yes to both questions. You can stash money in a retirement-savings plan if you have income from self-employment, even if you have a full-time job, too.

Advertisement - Article continues below

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

You can contribute up to $17,500, plus up to 20% of your net self-employment income (business income minus half of your self-employment tax), for a maximum solo 401(k) contribution of $52,000 in 2014. If you’re 50 or older this year, you can contribute up to $23,000 plus up to 20% of your net self-employment income, with a total contribution limit of $57,500. Your total contributions cannot exceed your self-employment income for the year. You have to open a solo 401(k) by December 31, but you have until April 15, 2015, to make contributions for 2014. You can find a list of solo 401(k) administrators at 401khelpcenter.com. Look for an administrator with plenty of investing options and low fees. Fidelity, Schwab and TD Ameritrade, for example, have no setup or maintenance fees.

Advertisement - Article continues below
Advertisement
Advertisement - Article continues below

If you have a 401(k) through an employer and some freelance earnings, your total employee deferrals to your employer’s plan plus your solo 401(k) are limited to $17,500 for the year (or $23,000 if you’re 50 or older). But you can still contribute up to 20% of your net self-employment income to the solo 401(k), regardless of your other contributions.

Contributions to an employer’s 401(k) don’t affect SEP limits. You can contribute up to 20% of your net self-employment income to a SEP, with a total contribution limit of $52,000 for 2014. You can open a SEP at most brokerages, fund companies and banks, where you usually have the same investing options as for IRAs. You have until April 15, 2015, to open an account and make contributions for 2014.

Now is a perfect time to start thinking about your contributions for 2014 -- especially if you’re about to pay quarterly taxes on September 15 and are estimating your self-employment income so far for the year. “The limits are substantial, and it’s hard for self-employed people to come up with that at the end of the year,” says Scott Tiras, an Ameriprise Financial Wealth Advisor in Houston. “Now is a good time to start setting aside that money.”

Even if you have a SEP or a solo 401(k), you can contribute up to $5,500 to a Roth IRA for 2014 (or $6,500 if you’re 50 or older this year), as long as your total modified adjusted gross income is less than $129,000 for the year if you’re single, or $191,000 if married filing jointly. The amount you can contribute starts to phase out for singles earning more than $114,000 or married couples earning more than $181,000.

Advertisement
Advertisement

Most Popular

11 Dividend-Paying Stocks You Should Think Twice About
dividend stocks

11 Dividend-Paying Stocks You Should Think Twice About

Dividend-paying stocks often can be a store of safety, but 2020 has been difficult on income equities. These 11 picks look like shaky plays despite th…
September 21, 2020
Medicare Basics: 11 Things You Need to Know
Medicare

Medicare Basics: 11 Things You Need to Know

There's Medicare Part A, Part B, Part D, medigap plans, Medicare Advantage plans and so on. We sort out the confusion about signing up for Medicare --…
September 16, 2020
Where You Should Invest Now
investing

Where You Should Invest Now

Kiplinger.com senior investing editor Kyle Woodley joins our Your Money's Worth podcast to answer investor questions about tech stocks, the election a…
September 22, 2020

Recommended

How To Buy a Roth IRA When You Make Too Much To Qualify For One
Roth IRAs

How To Buy a Roth IRA When You Make Too Much To Qualify For One

With their tax-free growth and tax-free withdrawals, Roth IRAs are a great deal — if you qualify. If you don’t, well, there’s still a way to get into …
September 23, 2020
HSA Limits and Minimums
health savings accounts

HSA Limits and Minimums

Annually adjusted contribution limits and other requirements must be met if you're covering health care costs with a Health Savings Account.
September 21, 2020
Don’t Be Paralyzed by Uncertainty
retirement planning

Don’t Be Paralyzed by Uncertainty

You definitely need a plan, because what’s ahead could be scarier than what’s behind us.
September 21, 2020
Insurance for Long-Term Care at Home
retirement

Insurance for Long-Term Care at Home

In the wake of COVID-wracked nursing homes, increasingly more people are looking at options to age in place with long-term care insurance.
September 17, 2020