How to Plan for Retirement as an Independent Contractor

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

Thankfully, there are a ton of retirement plans for independent contractors. The right one for you depends on your income level and your goals for the future. Rather than try to figure out the right plan for you, it’s always wise to talk to an expert, like a financial planner, when you’re making important financial decisions. Here are a few steps to help prepare for such a conversation.

Review Your Goals

If you haven’t already done so, now is the time to put your financial goals down on paper. First, figure out how much you want to save for retirement. There are many retirement calculators that can be useful to help nail down a number that’ll work for you. Second, note how much you think you’ll be able to contribute each month or year. Third, decide how comfortable 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. 

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 types of retirement plans for independent contractors: 

1. SEP IRA

SEP IRAs are available from 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. An independent contractor, who is 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 $69,000 for 2024. 

2. Solo 401(k)

A solo 401(k) is 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 in the business may be eligible to contribute too. 

There are no minimum required annual contributions. That means you can increase or decrease your contributions depending on how your business is doing each year, up to a maximum of $69,000 in 2024 (or $76,500 for those age 50 and older). Eligibility requirements are pretty straightforward: Anyone who 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 SIMPLE IRA)

With a SIMPLE IRA plan, you can put all your net earnings from self-employment in the plan, up to $16,000 in 2024. If you’re 50 or older, you can add an additional $3,500, for a total of $19,500. 

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 high setup and annual fees. 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, can be complicated for an independent business owner, and 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.