If you don’t have access to an employer-sponsored retirement plan such as a 401(k) or 403(b), there are still several retirement account options to help you save. What best fits your needs depends on a variety of factors.
No matter what type of retirement account (or combination of accounts) works best for you, making regular contributions will be key to helping secure your retirement. With that in mind, here are some of the options available to you.
Individual Retirement Accounts (IRAs)
Individual Retirement Accounts (IRAs) are savings accounts that let you save for retirement with tax-free growth or on a tax-deferred basis. Unlike an employer-sponsored plan, you deposit after-tax dollars, and there is a lower cap on how much you can invest every year. They come in several flavors, but the ones most people invest in are the traditional IRA and the Roth IRA. If you’re earning any money that can be taxed, you can contribute up to a total of $5,500 ($6,500 if you will be 50 or older by the end of 2016) to either or both types of IRA in 2016.
Contributions to a traditional IRA are typically tax-deductible, unlike Roth IRA contributions, depending on your income and tax filing status. When preparing your taxes, be sure to confirm if your contributions meet the criteria. Keep in mind, you can’t contribute to a traditional IRA after you turn 70½, and you have to start taking distributions by April 1 in the year after you turn 70½.
Roth IRAs are a little different. Those contributions aren’t tax-deductible. However, when you start taking qualified distributions—generally those made after you turn 59½ and at least five years after you open the Roth IRA—those withdrawals aren’t taxed. You don’t have to take minimum distributions, and you can contribute to it at any age.
For both types of IRAs, any interest and investment gains on assets generally aren’t taxable, as long as the assets stay in those accounts.
Other self-employed retirement options
IRAs are one way for you to always set something aside for retirement, but your total yearly contribution may not provide enough of a cushion for retirement—especially if you’re older or just starting to save now. But you have other options: you can set up a SEP (simplified employee pension) IRA, which will let you contribute either $53,000 or 25% of your income for 2016, whichever is less.
SEPs were originally designed as start-up retirement savings plans for businesses with fewer than 25 employees, but they’ve become increasingly popular among freelancers. If you’ve incorporated your business and pay yourself as an employee, this may be a good option, because SEPs are easy to set up and have low administrative costs and flexible annual contributions. And, if you keep working after you turn 59½, you can still withdraw money from your SEP tax-free.
Don’t let the lack of an employer sponsored retirement plan stop you from saving for retirement. You do have options, and the sooner you start saving, the more time there will be for that money to grow for you to live on after you retire.
This information is subject to change and should not be considered legal or tax advice. Individuals may not qualify for the IRA choices offered and not every IRA is suitable to every person due to individual circumstances. Honest Dollar does not provide legal or tax advice and if you have questions regarding your personal circumstances, you should consult a tax or legal professional.