Self-Employed? Strategies for Retirement Savings

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Prioritizing retirement savings when you're self-employed is difficult when you have fluctuating income levels. Here are a few strategies you can use!As of a 2012 study by Ameritrade, 10 million Americans are their own bosses. 70% of those who are self-employed don’t save for retirement regularly – 28% don’t save for retirement at all.

These business owners spend time and energy strategizing over business growth, but don’t have strategies for their retirement savings.

Self-employment is hard; as a business owner, you’re juggling many financial worries. You’re trying to make money, pay your personal bills, stay on top of self-employment taxes, and grow your business. It can be easy to let retirement savings fall by the wayside or think, “I’ll take care of that later, when my business is more secure”.

Let’s be real – you need to start saving for retirement as early as possible to take advantage of compounding interest. After all, that’s how you make your money work for you.

Another important consideration is that retirement contributions can be tax deductible. Sure, your retirement contributions make your tax returns a little more complicated, but you’re probably looking for every tax deduction you can find. Don’t ignore this one!

Where to Put Your Retirement Savings

If you haven’t even started to save for retirement, and don’t know what your options are, here are three popular choices for the self-employed:

SEP IRA

SEP stands for Simplified Employee Pension IRA. This option is available to all who are self-employed – small business owners and freelancers alike. In the case of a small business, only the “employer” can contribute, not the employees.

In 2015, you can contribute up to 25% of your net income – or up to $53,000, whichever is less. This is a key benefit over a traditional IRA, which has a much lower contribution limit. However, like a traditional IRA, you won’t pay taxes on SEP contributions, and you’ll be taxed for distributions.

Solo 401(k)

The Solo 401(k) plan is a qualified retirement plan designed specifically for businesses that only employ the business owner and their spouse. You don’t have to be self-employed full-time to take advantage of this plan.

You can actually set up your own 401(k) and be both employer and employee. This allows you to contribute the employee contribution limit ($18,000 in 2015) plus 25% of the business’ net earnings. (It can also be set up as a Roth 401(k), which means you make non-deductible contributions now and take tax-free withdrawals later.)

Unlike the SEP IRA, the solo plan includes a $6,000 catch-up contribution for participants who are over 50. The Solo 401(k) also allows you to take a personal loan of up to $50,000 or 50% of the account value, whichever is less. You can make withdrawals prior to retirement, with a 10% fee (plus taxes) deducted.

Traditional or Roth IRA

In addition to the options above, you can fund a Traditional or Roth IRA, which are open to all individuals regardless of their employment status. As of 2015, you can contribute $5,500 per year to a traditional IRA. Roth IRA contribution limits are driven by income levels.

Traditional IRAs come in deductible and nondeductible varieties. With deductible IRAs, you get a tax break for your retirement contributions, which isn’t the case for nondeductible IRAs. The deductible is generally the better deal. Roth IRAs are nondeductible.

IRAs have income qualifications and withdrawal rules that are too complex to cover in this post, but you can review more information on the IRS website.

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How to Contribute to Retirement with Fluctuating Income

Now you know where you can put your retirement savings. That’s the easy part. Figuring out how to fund your retirement plan is probably the hard part.

After all, almost all self-employed people deal with fluctuating income. Without a steady income, it’s hard to budget, and it’s even harder to save money. This month might have been a great month, but you never know what next month has in store.

Even with your non-steady income, you can plan for retirement. Here are a few strategies for funding your retirement accounts:

Have an Emergency Fund

What do I mean “Emergency Fund” – aren’t we talking about retirement here?

Yes, but you’ll never save for retirement if you’re scared you’re going to lose your house. Build up 3-6 months of your necessary expenses, and stash that money somewhere safe but relatively accessible. If you have a really bad month, you’ll pull from that account, so you don’t want to have to jump through hoops or pay penalties just to afford groceries.

If you don’t have a solid emergency fund, it will be too easy to convince yourself you can’t save anything for retirement. Don’t panic about saving for retirement until you have one.

Yes, you want to take advantage of compounding interest and yes, you want to start as early as possible. But saving for retirement is a marathon, not a sprint. Set yourself up for success by having a solid emergency fund in place.

Pay Yourself

Once you have an emergency fund, then you can approach retirement like you would if you had an employer – save a healthy percentage each month. If you worked at a traditional job, you would probably have a 401(k), with employer matching for some percentage.

Percentage is the operative word here. Even if you worked for an employer, you deal with percentages; don’t switch over to a flat rate now.

Start with a relatively low percentage. If you’re able to save that easily, then increase the percentage over time.

Automatic Withdrawals

Again, if you worked for an employer, you’d likely sign up for a 401(k) on the first day (or when your probation is over) with an automatic deduction from your paycheck. Honestly, I think I’d panic if I had to write a check or physically transfer money into my retirement accounts.

It’s a lot of money, and I could find other things that need that money. Any time you allow yourself to “touch” your money, you’ll be tempted to put your money toward something less responsible.

Plenty of institutions will allow you to set up an automatic deposit to your retirement account. The drawback here is that this will usually be accomplished through a flat rate – not a percentage.

Windfalls

Maybe you earn enough money each month to get by, but you don’t see a way to set aside money for retirement. In this scenario, you can consider using windfall money to fund your retirement. Anything from tax refunds to a big check from grandma qualifies as windfalls (unexpected income).

This can’t be your retirement plan for the rest of your life; you’ll contribute relatively little this way. However, if you just started your business and aren’t terribly sure how your finances will work out, this might be a good option for the short-term.

Set up a Schedule

If you worked for a traditional employer with a 401(k), you would make contributions with every paycheck. The basic principle of long-term investing is that you want your money to have the most opportunity to earn more money. Dollar cost averaging, or investing at regular intervals, beats trying to time the stock market.

However, this assumes you have the money to invest.

Month-to-month, you might see huge peaks and valleys in your income, but if you average it out over a longer period of time, it’s pretty steady. For example, maybe your income varies wildly from week to week, but you basically earn the same amount every three months. In this case, you would contribute a percentage to your retirement account every three months.

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Tax-Time Commitment

If nothing else, when you sit down to file your quarterly self-employment taxes, you should evaluate your financial state. You have an emergency fund – have you had to touch it at all? How much money did you make and what is the general trend of your earnings?

After taking stock of your finances, you can decide how much you’re comfortable setting aside for retirement. Don’t forget the tax deduction benefit of many retirement plans!

Mix it Up

You don’t have to pick one of the methods above and commit to it. In fact, it probably works a little better to mix and match methods. In my own case, I will be self-employed starting in August. I’m going to set up a healthy emergency fund first. I have a target percentage I’d like to put into a retirement account (I’m leaning toward a Solo 401(k) plan).

Each month, I’ll be checking on my family’s budget, which is a great time to check on my business’ income level. If my business is earning more than our budget needs, I’ll transfer money into a high interest savings account.

When I prepare my quarterly taxes, I’ll check on the trend of my business income as well as how much money I have in savings. I’ll contribute the target percentage at that time.

Later, once my business has grown and I have a pretty standard income level, I plan to automate the process by contributing a flat rate I’m confident I can support. I’ll catch up to my target percentage with quarterly contributions.


Self-employment is not for the timid. It can be very stressful, especially when you first start out. You’re probably never guaranteed your income – that’s a tough way to live. But you don’t want to continue in that path forever. At some point, you’ll want to retire and leave those worries behind. The only way to do that is to set up a plan that works for you and commit to it.

Are you self-employed? How do you handle retirement savings?