Self-Employed Retirement Plans Investing:
A Solo Journey to Financial Freedom in Retirement

Charting Your Course: Self-Employed Retirement Plans

Being self-employed is like playing a solo sport. Think of golf: it’s you against the course, relying on your skill, strategy, and perseverance to succeed. While it offers unparalleled freedom and control, it also means you’re solely responsible for your financial future, including retirement planning. The good news? There are excellent retirement plans designed specifically for self-employed individuals, such as SEP IRAs, Solo 401(k)s, and SIMPLE IRAs. Let’s explore these options and find out which one suits your unique needs best.

My Journey: From SEP IRA to Solo 401(k)

When I first started saving for retirement when I was self-employed, I chose a SEP IRA because it was easy to set up and required minimal paperwork. It was a great way to begin building my retirement nest egg without getting bogged down in administrative tasks. As my business grew and I had more money available to save, I switched to a Solo 401(k). This change allowed me to take advantage of higher contribution limits. It was a significant step that helped me maximize my retirement savings and tailor my investment strategy to my evolving financial situation. Even better, now that I’m getting closer to retirement I will be switching brokerage firms. This will add the flexibility of making Roth contributions, something that’s not available with my current provider.

SEP IRAs: Simple and Effective

A Simplified Employee Pension (SEP) IRA is a straightforward option for self-employed individuals or small business owners. It allows you to contribute up to 25% of your net earnings from self-employment, with a maximum contribution limit of $66,000 for 2023.

• Best For: SEP IRAs are ideal if you’re looking for a simple, low-maintenance plan with high contribution limits and no annual filing requirements.
• Pros: Easy to set up and administer, flexible contribution amounts, and contributions are tax-deductible.
• Cons: You must contribute the same percentage of salary for each eligible employee if you have any.

Example: I started my retirement savings with a SEP IRA because it was easy to set up and required minimal paperwork. It was a great way to begin building my retirement nest egg without getting bogged down in administrative tasks.

Solo 401(k)s: Powerful and Flexible

A Solo 401(k) is a powerful retirement plan designed for self-employed individuals with no employees (except possibly a spouse). It allows for higher contribution limits because you can contribute both as an employer and an employee.

• Best For: Solo 401(k)s are ideal if you’re looking for maximum contribution flexibility and higher limits.
• Pros: High contribution limits (up to $66,000 for 2023, or $73,500 if you’re 50 or older), allows Roth contributions, and you can take loans from your account.
• Cons: Requires more paperwork and annual filing of form 5500 with the IRS once your account balance exceeds $250,000.

Example: When Solo 401(k)s became available, I switched from a SEP IRA to a Solo 401(k) to take advantage of the higher contribution limits. Some of these plans offer the ability to make Roth contributions, which gives you more flexibility in your retirement planning. In order to delay the need to file a form 5500 with the IRS as long as possible, you may not want to roll over your SEP IRA into the Solo 401(k).  Keep in mind that you will no longer be able to contribute to the SEP IRA.

SIMPLE IRAs: The Plan for Small Businesses

A Savings Incentive Match Plan for Employees (SIMPLE) IRA is another retirement option for self-employed individuals and small business owners with fewer than 100 employees. It allows both employer and employee contributions, with relatively easy administration.

• Best For: SIMPLE IRAs are best if you want a plan that allows for employee contributions and requires less administration than a Solo 401(k).
• Pros: Easier to administer than a Solo 401(k), allows employee contributions, and has a lower start-up and maintenance cost.
• Cons: Lower contribution limits than SEP IRAs and Solo 401(k)s ($15,500 for 2023, with a $3,500 catch-up contribution for those 50 and older).

Example: If your business grows enough for you add employees this is the easiest way for you to give them access to a retirement savings plan. You may want to work with a financial advisor if you get to this stage.

Choosing the Right Self-Employed Retirement Plan for You

• Starting Out: If you’re just starting your business and prefer simplicity, a SEP IRA might be your best bet. It’s easy to set up, and you can contribute a significant amount without a lot of paperwork.
• Growing Income: As your business grows and your income increases, switching to a Solo 401(k) could be advantageous. The higher contribution limits and flexibility make it an excellent choice for maximizing your retirement savings.
• Small Business with Employees: If you’re planning to have a few employees, a SIMPLE IRA can be an effective way to offer retirement benefits without the complexity of a traditional 401(k).

Starting a Business Later in Life: Strategic Investments

For those starting a business later in life, retirement planning takes on added urgency. Here are a few strategic tips:

• Aggressive Saving: Maximize contributions to your retirement accounts. Solo 401(k)s, in particular, allow for significant catch-up contributions if you’re over 50.
• Diversified Portfolio: Ensure your investments are diversified across stocks, bonds, and other asset classes. This diversification helps balance risk and growth potential.
• Model Portfolios: Take a look at the Model Portfolios on this website to tailor your investment strategy to your specific retirement timeline and goals.

Investment Suggestions to Get Started

• Target Date Funds: These funds automatically adjust the asset mix as you approach retirement, becoming more conservative over time.
• Index Funds: Low-cost index funds can provide broad market exposure and are a great starting point for building a diversified portfolio.
• Exchange Traded Funds (ETFs): Consider low cost ETFs, in particular those that are a blend of income and growth, that invest in high-quality dividend-paying stocks. These investments can provide a steady income stream and potential capital appreciation without you having to pick individual stocks.
• Buffer ETFs: The closer you get to retirement to more you will want to protect your nest egg. Buffer ETFs provide a level of protection against a significant drop in the stock market. The ‘price’ is giving up some of your upside potential. For example, you may get protection from the first 15% fall in the stock market, but your potential gains may be limited to 15% as well. Most of the time this is a worthwhile tradeoff.

Conclusion: Mastering Your Financial Course

Planning for retirement as a self-employed individual may seem daunting, but with the right strategy, you can secure your financial future. Whether you opt for a SEP IRA, Solo 401(k), or SIMPLE IRA, each option offers unique benefits. Just like a golfer perfecting their swing, your success lies in the consistency of your efforts and the strategic choices you make along the way. So, chart your course, make those strategic swings, and ensure your journey to financial freedom is as smooth as possible.