Planning for Retirement as an Independent Contractor

By Rian Ervin | October 5, 2020

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Planning for Retirement as an Independent Contractor

What retirement plans for independent contractors exist in today’s world? Traditional employees (usually) have a 401(k) or the equivalent to help prepare for retirement. But, when you run your own business, putting a plan in place falls into your realm of responsibilities. 

Thankfully, there are a ton of retirement plans for independent contractors available. But, which one is right for you depends on a.) your income level and b.) your goals for the future. Before we go on, let’s get one thing straight: it’s always wise to talk to an expert, like a financial planner, when you’re making important financial decisions. But, to prepare for that conversation, here are a few steps to consider when planning for retirement as an independent. 

Find The Right Retirement Plans For Independent Contractors 

Review Your Goals and Priorities

Sure you may have passively thought about your goals for retirement contributions in the past, but it’s time to put it down on paper. First, figure out how much you want to save for retirement. There are a ton of retirement calculators available, so one of those might be helpful to help you nail down a number that’ll work for you. Then, note how much you think you’ll be able to contribute each month or year. How comfortable do you feel choosing and managing contributions on your own? If you think you’ll need to consult an accountant or financial expert, take that expense into account, too. 

Understand Your Options

Now that you’ve documented your goals, it’s time to look at which options will help you reach them. Here are a few options of retirement plans for independent contractors: 

1. SEP IRA

SEP IRAs are available to most major brokerage firms and they’re pretty easy to set up. And, unlike the 401(k) option, there’s little to no administrative overhead. A SEP IRA is a great fit for independents who have few or no employees since only the employer can make contributions. But, an independent contractor – who is in effect both employer and employee – can contribute by acting as the employer. 

The max SEP IRA contribution is the lesser of 25% adjusted net earnings or $61,000 for 2022 ($58,000 for 2021). 

2. Solo 401(k)

A solo 401(k) is, for all intents and purposes, a 401(k) that’s designed for, well, solo workers. It’s usually limited to just self-employed workers, though sometimes spouses who work at least part time for them may be eligible to contribute, too. 

There are no minimum required annual contributions, either. That means, you can increase or decrease your contributions depending on how your business is doing each year, up to a maximum of $61,000 in 2022 ($58,000 in 2021). And, eligibility requirements are pretty straightforward: Anyone that makes net profit from a sole proprietorship, LLC or other business asset can open a solo 401(k) as long as they have no employees other than their spouse. 

3. Savings Incentive Match Plan for Employees (aka, a SIMPLE IRA)

With a SIMPLE IRA plan, you can put all your net earnings from self-employment in the plan, up to $14,000 in 2022 ($13,500 in 2021). If you’re 50 or older, you can add an additional $3,000 into the plan. 

Unlike the SEP IRA, SIMPLE IRAs let employees make contributions. With a SIMPLE IRA, though, the employer is required to make a contribution on the employee’s behalf – either a dollar-for-dollar match of up to 3% of salary or a fixed 2% of pay – regardless of what they contribute to the account.  

4. Defined Benefit Plan

A defined benefit plan is, essentially, a pension (aka a guaranteed stream of income) for the self-employed. They’re a particularly good option for high earning independents, especially if you’re near retirement. They are pretty expensive with a high setup fee and annual fee. And, if you have employees, that fee will go up and you’ll need to contribute on their behalf. But, you can stash a LOT of cash in them. Defined benefit plans have very high contribution limits, but do require working with an actuary to implement and maintain.

Set Yourself Up for Success

Managing finances, especially retirement, is complicated as an independent. But planning ahead is an important part of your job to establish future financial security. Take savings seriously and incorporate retirement savings into your budget.

Remember, as an independent there are a lot of benefits on your side—consider talking to a tax advisor or accountant about how to structure your retirement savings to reduce tax liability, and what other benefits you might be entitled to as an independent contractor. At MBO, we have a long history of taking care of independents with all types of goals and financial situations. Our team is here to help answer any retirement questions you have.

The information provided in the MBO Blog does not constitute legal, tax or financial advice. It does not take into account your particular circumstances, objectives, legal and financial situation or needs. Before acting on any information in the MBO Blog you should consider the appropriateness of the information for your situation in consultation with a professional advisor of your choosing.  

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