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Tough Task: Retirement Planning for the Self-Employed

November 18, 2015
Self-employed and retirement savings planning

Perhaps the desire to call the shots or turn an enterprising business idea into reality drives Americans from the traditional workforce into the ranks of the self-employed. Others may be forced to get creative when their cubicle job disappears. Whatever the reason, more Americans find themselves self-employed these days. And with that, many discover that freedom is not always so free.

In fact, the demands of self-employment in the near term can potentially hinder financial stability, namely retirement, for the long run. Data shows that envisioning and planning for retirement is often knocked down the list of priorities by the self-employed. Some self-employed individuals are increasingly strained by out-of-pocket health care costs for themselves—especially if they help their small staffs by shouldering some of the insurance costs burden. That’s according to the findings of a 2015 survey by TD Ameritrade Holding Corporation (see the sidebar below for a sampling of the survey’s findings).

The good news is that the retirement planning industry is getting increasingly savvy in helping the self-employed keep eventual retirement a reality. And the industry is anchored by retirement plans designed for the self-employed, many of which are modeled similarly to plans used in the traditional workplace.

Don’t sabotage retirement. Even modest, regular savings can go a long way toward long-term goals. There are saving and investing plans that can help you get on track. It all starts with selecting the best fit.

1. For the Sole Proprietors: SEP IRA
A SEP (Simplified Employee Pension) plan IRA may be attractive for its fairly high annual contribution limits and minimal paperwork, whether or not you have employees. It also gives you the flexibility to vary contributions—or skip them entirely—according to your yearly business needs. A SEP IRA can be ideal for a sole proprietor. Annual contributions can be as high as 25% of net self-employment income for an owner—up to $53,000 in 2015 and 2016. However, there are a few caveats if you have employees: All contributions are made by the employer, not the employee. And, as an employer, you’re required to contribute the same percentage of an employee’s compensation as you contribute for yourself. So, costs may come into play.

2. All In the Family: Individual 401(k)
This choice offers higher contribution limits, so an individual 401(k) or an individual Roth 401(k) can be a great choice for contributing a lot. But it’s only available if you work for yourself or your only employee is your spouse. It requires more paperwork than a SEP, but allows 25% of net self-employment income for the business owner, plus an additional $18,000 in salary deferrals for 2015 and 2016, with a maximum of $52,500. If you’re 50 or older, you can contribute an additional $5,500, bringing the maximum to $58,000. Your employed spouse can also contribute up to $18,000 in salary deferrals (plus a catch-up contribution of $5,500 if he or she is age 50-plus). And you, as the employer, can match that contribution up to 25% of salary. This plan allows you to borrow against your savings.

3. Take Ownership: SIMPLE IRA
A SIMPLE (Savings Incentive Match Plan for Employees) IRA is available to companies with 100 or fewer employees. With this plan, employees make their own retirement contributions—up to $12,500 for 2015 and 2016, with a catchup contribution of $3,000 for those 50 or older. As the employer, you’re only required to make a small matching contribution (dollar-for-dollar up to 3% of employee compensation). Although your financial obligation as an employer is less, the contributions you can make for yourself are also significantly lower than for a SEP IRA or individual 401(k). Yep, you’re subject to the same rules as your employees.

4. Tried and True? Traditional IRA
This can be a smart individual choice that offers potential tax benefits. You can contribute to both a small business retirement plan and a traditional IRA and potentially get a tax deduction for each, depending on your income. The maximum for 2015 and 2016 is $5,500, with a $1,000 catch-up contribution if you’re 50 or older.

5. Slicing Up that Pie: Profit-Sharing
Offering rewards on a sliding scale, this choice may fit businesses with varying profits and, importantly, varying contributions from staff toward those profits.

TD Ameritrade does not provide tax advice. We suggest you consult with a tax-planning professional with regard to your personal circumstances.

Retirement savings and the self-employed


These few numbers reveal the significance of the shortfall in retirement savings and financial concerns among a survey group of self-employed individuals. Source: Head Solutions Group for TD Ameritrade Holding Corporation. Research provider Head Soutions Group (U.S.) Inc. and TD Ameritrade Holding Corporation are separate, unafilliated companies and are not responsible for each other’s products and services.

Your Math Can Start Here

Retirement calculators are part of a handful of tools that you can test for free and utilize fully once you become a TD Ameritrade client. 

The information presented is for informational and educational purposes only. Content presented is not an investment recommendation or advice and should not be relied upon in making the decision to buy or sell a security or pursue a particular investment strategy.

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