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.

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.

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.

Most Popular

Your Guide to Roth Conversions
Special Report
Tax Breaks

Your Guide to Roth Conversions

A Kiplinger Special Report
February 25, 2021
11 Best Healthcare Stocks for the Rest of 2021
healthcare stocks

11 Best Healthcare Stocks for the Rest of 2021

The 2020s could be the decade of healthcare stocks. Here are 10 companies and one ETF to watch not just for the remainder of this year, but well beyon…
July 13, 2021
What Is the Social Security COLA?
retirement

What Is the Social Security COLA?

For the average recipient, the 2021 monthly increase doesn't even cover a fill-up at the gas station — but it beats nothing.
July 14, 2021

Recommended

13 States That Tax Social Security Benefits
social security

13 States That Tax Social Security Benefits

You may have dreamed of a tax-free retirement, but if you live in these 13 states, your Social Security benefits are subject to a state tax. That's on…
July 26, 2021
33 States with No Estate Taxes or Inheritance Taxes
retirement

33 States with No Estate Taxes or Inheritance Taxes

Even with the federal exemption from death taxes raised, retirees should pay more attention to estate taxes and inheritance taxes levied by states.
July 26, 2021
10 Least Tax-Friendly States for Retirees
retirement

10 Least Tax-Friendly States for Retirees

When it comes to state and local taxes, retirees in these states are likely to pay more than retirees in other states.
July 26, 2021
10 Most Tax-Friendly States for Retirees
retirement

10 Most Tax-Friendly States for Retirees

If you want your retirement savings to last longer, consider moving to one of these states that impose the lowest taxes on retirees.
July 26, 2021