• John J. Diak, CFP®

3 Steps to Save for Retirement When You're Self-Employed


Self-employment comes with a lot of perks, but a company-sponsored retirement plan handled by the human resources department typically isn’t one of them. You went out on your own to enjoy freedom, flexibility, and opportunity, but when it comes to funding your retirement the trade-off is just that — you’re on your own.


Far too often, self-employed professionals fail to make planning or saving for retirement a priority. Maybe you aren’t setting money aside because your income is inconsistent and you fear cashflow problems. Perhaps you are not putting money away because retirement planning is one more thing to do on your already overflowing plate. Whatever the reason, you can’t afford to ignore the importance of saving for retirement any longer.


Here is how to save for retirement when you’re self-employed:


Get Clear on The Numbers

The first step is to look carefully at your income and household budget. This can be more challenging than it is for salaried or wage-earning employees if what you pay yourself fluctuates. But it’s important to think of retirement savings as a regular bill, no different from any other bill. You wouldn’t tell your mortgage company that you aren’t making a payment this month if you can help it, so you should take an equally committed approach to fund your retirement accounts.


To determine the amount you should be saving each month, you first need to estimate how much money you will need to retire comfortably. The overall estimation should take into account inflation, increases in income over time, the expected annual rate of return, expected Social Security and other income, the age you plan to retire, and other factors related to your personal financial circumstances.


Getting clear on the numbers and knowing your target savings amounts will help you determine the best kind of retirement account for you.


Decide Where to Put Your Money

The good news is, just like employees have the option to participate in company plans, you also have many options to save for retirement when you are self-employed. Here are the types of plans from which you can choose.


  • Traditional IRA: In most cases, an IRA is one of the easiest ways for self-employed people to get started with retirement savings. There are no special filing requirements and you can put aside up to $6,000 tax-deferred in 2020.

  • Roth IRA: The Roth IRA is just as simple to get started with as a traditional IRA as long as you are within the set income limits, with no special filing requirements and the option to save up to $6,000 in 2020. While there isn’t an immediate tax deduction for Roth IRAs, your withdrawals will be tax-free in retirement.

  • SEP IRA: Whether you are a solo entrepreneur or a small business owner with a few employees, the SEP IRA may be a good option because it doesn’t require any annual reporting to the IRS and has high contribution limits. But if you have employees, you’ll have to make contributions to their accounts that are equal to your own annual contribution.

  • Solo 401(k): This single-participant plan works exactly like an employer-offered 401(k) plan. You can make pre-tax contributions as both an employer and participant — up to $19,500 in 2020, or $26,000 if you are age 50 or older as a participant and an additional 25% (minus your personal contribution) as the employer, for a total limit of $57,000, or $63,500 if you are age 50 or older.

  • Defined Benefit Plan: If you are a self-employed professional making a high income, you can set up a guaranteed income in retirement, which is essentially setting up your own pension plan. Contributions are typically tax-deductible and limits are high. However, it’s a complex and expensive plan to administer and requires hefty fees. You may want to consider this option if you are nearing retirement and can put aside large amounts tax-deferred.

  • SIMPLE IRA: This plan has a lower contribution limit than many other options and it’s less flexible, but if you own a midsize company with fewer than 100 employees, it can be a good plan as it is fairly easy to set up and administer. Employees can contribute through tax-deferred salary withholding, and as an employer, you would generally be required to make contributions based on a percentage of the employee’s salary.

When deciding where to put your money, the best type of account depends on a number factors, including your age, how much you’re able and willing to save, the level of administrative complexity and cost you can manage, and whether or not you have employees.


Open and Fund Your Retirement Accounts

Now that you know what options are available to you, you will need to decide which account or combination of accounts you want to open. If you are still uncertain, consider speaking with a financial advisor who is familiar with financial planning for self-employed people.

When you are ready to open an account, you will also need to decide where to open it. You can work directly with a broker to walk you through the process and an accountant who can advise you on the tax implications of your choices.


The key is to make saving for retirement as simple and effective as possible.


John J. Diak, CFP® is the Principal & Client Wealth Manager at Oatley & Diak, LLC in Parker, Colorado. He assists clients through many difficult lifestyle changes such as business downturns, retirement planning, divorce, the death of a spouse, and family estate issues among others. Oatley & Diak, LLC is a family-run registered investment advisory (RIA) firm that provides clients with investment management and financial planning services in a hands-on, intimate environment. Learn more about them at oatleydiak.com.


The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.


This material was prepared by Crystal Marketing Solutions, LLC, and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate and is intended merely for educational purposes, not as advice.


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