Retirement Plan Options for the Self-Employed and Gig Workers

Whether you’re a freelancer or an entrepreneur, being your own boss has many perks. You can set your own schedule, prioritize the projects that mean the most to you, and you have the leverage to make key decisions that can alter the course of your career. When you’re self-employed, however, you don’t have the built-in benefits that come with being an employee of a company, such as employer-sponsored retirement plans that help you save for retirement.

Luckily, there are plenty of options when it comes to planning for retirement if you’re self-employed or a gig worker. Below are six types of retirement plans and accounts you can open yourself to start saving for the future.

1. Traditional and Roth IRAs

A traditional or Roth IRA is a common choice and is suitable for individuals who are saving less than or up to $6,500 in 2023 ($7,500 for those age 50 or older). There are advantages to both – you will have tax deductions on a traditional IRA that you won’t have to worry about after retirement. With a Roth, there is no immediate deduction and withdrawals, after you retire, are tax-free.

2. SEP IRA

A Simplified Employee Pension (SEP) IRA works for those who are self-employed with few or no employees. The contribution limit in 2023 is 25% of compensation, up to $66,000. There is a $330,000 limit on compensation for 2023. Employers must contribute an equal percentage of salary for each employee, and you will also be counted as an employee.

3. Solo 401(k)

The solo, or one-participant 401(k) plan is a traditional 401(k) that is for self-employed individuals who do not have employees. You can contribute up to $22,500 for 2023, and if you’re age 50 or older you have an additional $7,500 you can add as a “catch-up” contribution. There are a number of variables that can assist with your contributions, including the special rule for single-member LLCs and sole proprietors: You can contribute 25% of net self-employment income. Contributions are made pre-tax and any distributions after age 59½ are taxed.

4. Defined Benefit Plan

This plan is a fitting choice for self-employed individuals who are looking to put away more each year than your typical allowed contributions. For 2023, the maximum contribution is $265,000. The contribution will be based on how much you will be receiving once you retire, your age, and the expected return on your investments. Contributions are tax-deductible in most cases, and the distributions during retirement will be taxed as income.

5. Simple IRA

The Simple IRA (Savings Incentive Match Plan for Employees) is ideal for business owners who have 100 or fewer employees. For 2023, you can contribute up to $15,500, with a catch-up contribution of $3,500 if you are age of 50 or older. If contributing to another plan, your total contributions cannot exceed $22,500. The contributions are deductible, but any distributions during retirement are taxed. Any contributions you make to an employee account is also deductible as a business expense.

6. Self-Directed IRA

A self-directed IRA (SDIRA) maintains the same eligibility and contribution limits as a traditional IRA. However, a SDIRA enables account holders to invest in alternative assets, such as precious metals, cryptocurrency, and real estate. With a self-directed IRA, you are the primary manager of your account, so you choose exactly where to allocate funds. However, with many unique investments available it’s essential that holders understand the regulations, knowledge, and time commitment involved in their investments.

Being self-employed or a gig worker certainly has its perks, but it also oftentimes means making big decisions for your future on your own. Before deciding which self-employed retirement plan option to commit to, step back and ask yourself what will work best for your unique situation, ideal future, and risk tolerance. It's a complex topic and a big decision, so to get help with making the right choice for your future feel free to...