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How to Set Up Your Own Retirement Plan

November 11, 2019 in Retirement   15 min read

The joys of self-employment are hard to deny, but it’s also necessary to mention the various stressors that go along with it. One of the key things you have to understand. Unlike those who work for others, you are responsible for paying all of your taxes, maintaining your own unemployment and workers' compensation insurance. In addition, you hold the entire responsibility for planning for your own retirement entirely on your own. The responsibility for creating a satisfying quality of life postretirement is entirely yours.

The Huge Growth of Self-Employment 

The number of people working for themselves has been soaring for years. A 2018 study by financial software developer Freshbooks determined that, by next year, 2020, as many as 42 million Americans could be self-employed professionals. That number accounts for a full third of all working Americans. While the spirit of entrepreneurialism should certainly be applauded, it's also necessary to point out that about 40 percent of self-employed workers only save for retirement on occasion, while 28% of them say they aren’t saving for retirement at all.

That is an unfortunate fact because, no matter how busy you think you are and how many things you have to do, it is imperative that you make saving for retirement a major priority. Luckily, there are several retirement plans that are specifically designed for people who run their own business.  While they are less obvious or automatic as they are for corporate employees, such plans really do exist.

Not only such retirement plans offer tax-sheltered earnings; they also have the potential to save a higher dollar amount and/or a higher percentage of your income than is even possible as a staff worker with a larger employer.

Why Saving Is Hard for the Self-Employed 

According to the Freshbooks study, the top reasons self-employed workers gave for failing to save toward retirement will not exactly surprise anyone. They include:

  • Lack of Steady Income
  • Paying Off Major Debts
  • Health Care Expenses
  • Education Expenses
  • Costs of Running the Business

In virtually every way, for a self-employed worker, setting up a retirement plan is a do-it-yourself job, like everything else that must be done. Unlike just about any corporate worker for a private business, there is no human resources staffer who is willing to walk you through a plan application for a 401(k), or whatever the company-sponsored retirement program is based upon. There also will be no automatic paycheck deductions, no matching contributions, and no shares of company stock, and no automatic paycheck deductions. In order to save a proper amount for retirement, you will have no choice but to be highly disciplined when it comes to contributing as much as possible to the plan. This is a challenge in many ways, in part because it depends on how much you earn, and you often won’t know that each month. In fact, sometimes, you won’t really know how much you can contribute until the end of the year.

Of course, while freelancers have unique challenges when it comes to saving for retirement, they have unique opportunities too. Funding your retirement account can be considered part of your business expenses, as is any time or money you spend on establishing and administering the plan. Even more important, a retirement account allows you to contribute pretax dollars, which lowers your taxable income. And many of these plans allow you, as a business owner, to contribute more money annually than you could to an individual IRA.

Self-Employed Retirement Saving Plans

There are four retirement savings options favored by the self-employed. Some are basically single-player 401(k) plans, while others are based on individual retirement accounts (IRAs). They are:

One-Participant 401(k)



Keogh Plan

The Details About Retirement Plan Options

With all four of the above options, your contributions are tax deductible, and you won’t pay taxes until you cash out at retirement. To avoid penalties, you’ll need to leave your savings in whichever account you choose until you are at least 59 1/2 because early withdrawals carry penalties. There are certain hardship exemptions, which you should know about, but unless there is a dire emergency, early withdrawals are not recommended.

The complexity and suitability of each plan can vary widely, and largely depends on the size of your business, in terms of both the size of your personnel and earnings. Therefore, let’s look at the full details of each.

One-Participant 401(k) 

A one-participant 401(k), which is how the Internal Revenue Service (IRS) refers to it officially, is also occasionally referred to as a solo 401(k), solo-k, or uni-k, in addition to individual 401(k). This type of plan is reserved only for sole proprietors with no employees other than a spouse working for the business.

The one-participant plan looks very much like the 401(k) that is offered by many large companies, including the amounts you are able to contribute each year. The only significant difference is that you can contribute as the employee and the employer, which provides you with a higher contribution limit than many other tax-advantaged plans.

If you are used to participating in a standard corporate 401(k), you would make investments as a pretax payroll deduction from your paycheck, and your employer would have the option of matching those contributions up to certain amounts. You get a tax break for your contribution, and the employer gets a tax break for its match. With a one-participant 401(k) plan, you’re both the boss and the worker, you can contribute as both. 

For 2019, elective deferrals can be up to $19,000, or $25,000 if you are age 50 or older (those limits increase to $19,500 and $26,000 for 2020). Total contributions to such a plan cannot exceed $56,000, or $62,000 for people age 50 or older (rising to $57,000 and $63,000 in 2020). If your spouse is working for you, they can also make contributions up to the same amount, and then you can match those. It's clear to see why the solo 401(k) is so popular; it offers the most generous contribution limits of available plans.

These are generally difficult plans to set up they include significant accounting, administration, and filing requirements to open. Once the plan is set up, however, a solo 401(k) is actually very simple to maintain. In fact, until the assets in your account exceed $250,000, no filing is required at all. Despite that simplicity, a solo 401(k) has all the same major tax advantages of a normal, multiple-participant 401(k) plan, and the before-tax contribution limits and tax treatment are identical.

To establish an individual 401(k), the business owner must work with a financial institution, who may impose fees and certain limits as to what investments are available in the plan. Some plans, for instance, may limit you to a fixed list of mutual funds (typically sponsored by that institution). That said, a little bit of shopping will turn up many reputable and well-known firms that offer low-cost plans with a lot more flexibility.


Officially, the "SEP" stands for simplified employee pension. That means a SEP IRA—as the name implies—is a variation on a traditional IRA. It is perhaps the easiest plan to establish and operate, and it is an excellent option for sole proprietors, even though it allows for one or more employees too.

You can contribute as much as 25% of your company’s net earnings annually to a SEP IRA, with a maximum limit of $56,000. In a SEP IRA, only the employer alone contributes to the fund, not the employees, and the net profit is defined as your annual profit less half of your self-employment taxes), up to that maximum of $56,000 in 2019. The plan also offers flexibility to vary contributions, which means you can make them in a lump sum at the end of the year, or skip them altogether. There is no minimum annual funding requirement, which is helpful for those off years.

Whereas SEP IRAs are simple, they are not necessarily the most effective means of saving for retirement. It's possible to contribute more to a SEP IRA than a solo 401(k), but, since it's based on a percentage of profits, you have to make enough money to contribute.


SIMPLE is an anagram and stands for the "savings incentive match plan for employees," which makes a SIMPLE IRA something of a cross between an IRA and a 401(k) plan. Although available for sole proprietors, it works best for small businesses: companies with 100 or fewer employees that might find other sorts of plans too expensive.

The SIMPLE IRA follows the same investment, rollover, and distribution rules as a traditional or SEP IRA, except for its lower contribution thresholds. You can put all your net earnings from self-employment into the plan, up to a maximum $13,000 in 2019, plus an additional $3,000 if you are 50 or older. Employees can contribute along with employers, in the same annual amounts. As the employer, however, you are required to contribute dollar for dollar up to 3% of each participating employee’s income to the plan each year or a fixed 2% contribution to every eligible employee’s income, whether they contribute to the plan or not.

So, not unlike a Solo 401(k) plan, the SIMPLE IRA is funded by tax-deductible employer contributions and pretax employee contributions. In a way, the obligation of the employer is less—because employees make contributions—but there is that mandated matching. And the amount you the employer can contribute for yourself is subject to the same contribution limit as the employees.

Another thing to consider with a SIMPLE IRA is the extra-heavy withdrawal penalties, which are 25% within the first two years of the plan.

As with other IRAs, these plans must be opened with a financial institution, and that institution will have rules regarding what types of what investments can be made under the plan. They may also charge fees for plan administration and participation. The process is similar to a SEP IRA, but the paperwork load is a little heavier.

Keogh Plan 

The Keogh plan or HR 10 plan, which is more commonly known as a qualified or profit-sharing plan, is arguably the most complex of the plans intended for self-employed workers. Despite its complexity when it comes to set-up and administration, a Keogh it is also the option that allows for the most potential retirement savings.

A Keogh plan is a tax-deferred pension plan available to both self-employed individuals or unincorporated businesses for the sole purpose of retirement. Any Keogh plan can be set up as either a defined-benefit or defined-contribution plan, although most plans are set as defined contribution plan. That means contributions are generally tax deductible up to a certain percentage of annual income, with applicable absolute limits in U.S. dollar terms, which the IRS changes from year to year.

While a Keogh plan is the most complex of the four plans. It also potentially allows for the most retirement savings. In the form of a defined-contribution plan, a fixed sum or percentage is contributed every pay period. For 2019, these plans cap total contributions in a year at $70,000. Another option, though, allows them to be structured as defined-benefit plans. In 2019 the maximum annual benefit was set at $225,000 or 100% of the employee’s compensation, whichever is lower.

A business must be unincorporated and set up as a sole proprietorship, limited liability company (LLC), or partnership to use a Keogh. Although all contributions are made on a pretax basis, there can be a vesting requirement.

These plans are most beneficial to high earners, especially when the defined-benefit version is used, which allows greater contributions than any other plan. A Keogh is best suited for firms with one or two high-earning bosses and several lower-earning employees. This type of is quite popular for medical or legal practices.

Keogh Plans have federal filing requirements, and the paperwork and complexity often mean that professional help, whether it comes in the firm of an accountant, investment advisor, or a financial institution, is almost always necessary. Your available options for custodians may be more limited than with other retirement plans— an online-only service bank probably won't work. A traditional brokerage like Charles Schwab is offers and services these sort of plans and may be your best bet.

If none of the above plans seems a good fit, you can start your own individual IRA. Both Roth and traditional IRAs are both available to anyone with employment income, including freelancers. Roth IRAs let you contribute after-tax dollars, while traditional IRAs let you contribute pretax dollars. In 2019 the maximum annual contribution is $6,000, $7,000 if you are age 50 or older, or your total earned income, whichever is less. 

Most freelancers work for someone else before striking out on their own. If you had a retirement plan with a former employer, the best way to manage the accumulated savings is often to transfer them to a rollover IRA or, alternatively, a solo 401(k). Rolling over allows you to choose how to invest the money, rather than being limited by the choices in an employee plan. Also, the transferred sum can jump-start you into saving in your new entrepreneurial career.

Managing Your Retirement Funds 

Make no mistake: You need to start saving for retirement as soon as you start earning income, even if you can’t afford much at the beginning. The sooner you start, the more you’ll accumulate, thanks to the miracle of compounding interest.

Even if you can only save $40 per month at first, if you can invest that money at 4.65%, which is what the Vanguard Total Bond Market Index Fund earned across the most recent 10-year period, you will be off to a great start.  If you manage to do that for 30 years with no changes, your account will accumulate as much as $31,550. Raise the interest rate to 8.79%, which is the average yield of the Vanguard Total Stock Market Index Fund over the same period, and that number rises to more than $70,000.

As your savings build, get the help of a financial advisor to determine the best way to apportion your funds. Some companies even offer free or low-cost retirement planning advice to clients and some robo-advisors such provide automated planning and portfolio building as a low-cost alternative to human financial advisors.

The bottom line is, creating a retirement strategy is vitally important when you are a freelancer, because don’t have an HR department looking out for your retirement; it's all on your shoulders.  In essence, your mantra should be “Pay yourself first.”


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