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Challenges Independent Contractors Face and How to Overcome Them: Planning for Retirement

By Rian Ervin |

Updated Monday, October 5, 2020

consultants talking and working on charts

Planning for retirement is a challenge for many independent professionals. As a typical employee, you can rely on your employer to provide 401(k) plans or other options to help prepare for retirement, but when you run your own business putting a plan in place is up to you.

Luckily, there are many retirement options available for independent contractors depending on your individual goals for the future and income level. When making important financial decisions it is always advisable to talk to an expert like a financial planner. Here are a few steps to consider when planning for retirement as an independent.

Review Your Goals and Priorities

Take some time to write down your goals and priorities when it comes to retirement contributions. First, determine how much you want to save for retirement. There are a number of retirement calculators available; you may want to consult a few to get to a number that sounds right to you. Then, consider how much you think you’ll be able to contribute per month or per 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 for help, you’ll want to take this expense into account as well.

Understand Your Options

With your goals in mind, take a look at what the best retirement option might be for your situation. There are a few options in particular that can benefit freelancers:

1. Solo 401(k)

A Solo 401(k) plan offers high contribution limits—as a solo business owner you can contribute both as an employee and an employer—and there is no minimum required annual contribution. This allows you to increase or decrease your contribution depending on how your business is doing each year.

2. SIMPLE IRA

A SIMPLE IRA plan can work for a solo business owner or for a businesses with less than 100 employees. There are minimal fees, tax-deductible contributions, and customizable employee contributions. With a SIMPLE IRA you can set aside contributions on a pre-tax basis, and as an employer you can deduct any matching contributions as a business expense.

3. SEP IRA

A SEP IRA is ideal for independents who have few or no employees. It allows employers to set aside funds in IRA retirement accounts for themselves or for employees. Contributions are tax-deductible. SEP IRAs have minimal fees, allow for flexible contributions, and are easy to create and maintain. Keep in mind that an SEP IRA only allows you to contribute up to 25% of your net earnings, up to a maximum of $57,000 in 2020.

4. Defined Benefit Plan

A defined benefit plan is a good option for independents who have few or no employees and are looking to save a lot for retirement. 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.