How Self-Employed Individuals Can Invest In Their Future

As a self-employed individual, you decide which jobs you’ll take and when you work. In exchange for the freedom to be your own boss, you give up an employer-funded retirement fund, though. Thankfully, you have numerous options that allow you to save for retirement and invest in your future.

Individual or Solo 401K

A solo 401k allows you to contribute to a retirement fund even though you’re self-employed. Known as a one-participant, individual or uni account, this option is beneficial if your income varies. Simply boost your contribution when you make more. Or invest less during slow years.

You can invest up to $61,000 if you’re under 50 or $67,000 if you’re over 50. Plus, add a catch-up contribution of $6,500. As a sole proprietor or single-member LLC, you can also contribute 25% of your net self-employment income.


Note that the limit on compensation is $305,000 for 2022. That means you can contribute based on income less than or equal to this number.
You can even hire your spouse to boost contributions and effectively double your savings. With this strategy, both you and your spouse can contribute to the same Solo 401k each year.

Select a traditional or Roth version of the Solo 401k. Like IRAs offered by employers, both versions include pros and cons.
The traditional version allows you to contribute money before it’s taxed. Then, you’ll pay tax on the distributions after you turn 59.5. This option makes sense if you want to lower your taxable income now.

Money in the Roth version grows tax-free because you contribute money you’ve already paid taxes on. Consider this account if you expect your income and thus your tax burden to be higher in retirement.

Simplified Employee Pension (SEP) IRA

Use your income and goals to decide how much to contribute to a SEP IRA. Currently, you can save as much as 25% of your net self-employment income in a SEP IRA. Maximum contributions in 2022 total the lesser of $61,000 or 25% of your net self-employment earnings. The IRS sets the compensation limit at $350,000.

While you can’t make catch-up contributions, you can set up a SEP IRA any time of year. Plus, you can deduct SEP IRA contributions on your tax return. For this reason, you may wish to open this investment account before your tax due date.

Also, note that SEP IRA distributions are taxed as income during your retirement years. Right now, there’s no Roth version of the SEP IRA.

Open a SEP IRA through your bank or financial institution. Your mutual fund or plan administration company can also help. Paperwork requirements are fairly light, which makes this investment option attractive for busy individuals.

Savings Incentive Match Plan for Employees (SIMPLE) IRA

A SIMPLE IRA may be ideal if you have a large income. This option is also beneficial if you don’t have another retirement account.

In 2022, you can contribute up to $14,000 into a SIMPLE IRA. Plus, add an extra $3000 if you’re over 50. You can also make a fixed contribution of 2% or a 3% matching contribution.

Ideally, open a SIMPLE IRA between January 1 and October 1. The only exception is if you start working for yourself after October 1.

To establish a SIMPLE IRA, complete IRS-approved forms. Visit your bank or financial institution, mutual fund manager or plan administration company for assistance.

Only open a SIMPLE IRA if you plan to invest your money long-term. You will owe a 25% penalty if you withdraw funds during the first two years after you open this account.

Because the contribution limits are fairly low, consider other options, too. You may save more with another avenue like the Solo 401k.

Defined Benefit Plan

Save a significant amount of money for retirement when you choose a defined benefit plan. It functions basically like a pension from a traditional employer. You receive a set benefit each year after you retire.

This option is ideal if you have a high income and plan to contribute the same amount of money each year. Contributions can reach $80,000 or more.

To calculate your contribution limits, talk to your plan administrator. Contributions are calculated based on your age, expected return, and other factors. In 2022, the maximum annual benefit is up to $245,000.

Generally, contributions are tax-deductible. Then, you’ll pay tax on the distributions.
With a defined benefit plan, expect to pay a set-up fee and annual fees. You’ll also have to complete significant paperwork.

Passive Income Streams

Purchase real estate, open a dropshipping business, create an app, run an Airbnb, or sell courses, videos and photography online. These passive income options require both financial and time investments, especially in the beginning. The reward is extra income that works for you and helps you meet your goals. Invest the money you make into your savings.

How to Get Started

Before you choose one of these investment options, figure out how much money you need to save for retirement. Use an online calculator to figure out the total you need to save.

Next, open one of these investment options. Talk to your financial advisor or visit an online broker.

Also, remember to file the appropriate paperwork with the IRS. The paperwork burden depends on the type of account you open and its balance.

Finally, review your funds at least annually. Increase your contribution, if possible, and make sure the option you’ve selected remains the most economical choice for your needs. You can always add an additional investment tool or adjust contributions.

Invest in Your Future

Being self-employed is beneficial. Schedule a consultation with your financial advisor or accountant, and discuss your unique situation. Do a little homework now to ensure you save enough money to support the retirement lifestyle you want later.

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