Are you new to self-employment? Or are you trying to figure out how to invest in a retirement account as a business owner? Being self-employed means you won't have access to an employer-sponsored matching 401(k) that usually comes with traditional employment. The good news is that you still have many retirement options that can provide you with opportunities to save for your financial future. Here are five types of retirement accounts for the self-employed.

Who Are the Self-Employed?

You are self-employed if you run a business or are an independent worker. You don't have an employer who provides you with a retirement plan. Generally, a person is said to be self-employed when they work as freelancers, contractors, consultants, small business owners, or are a part of the gig economy. These workers lack the retirement benefits available to workers from larger companies.

Self-employed individuals comprised 10.1% of the workforce in 2023. The percentage of self-employed employees continues to rise with the increased utilization of online businesses, and most employers intentionally reduce employee hours to avoid offering benefits. Increased flexible and online work has led to increased self-employment.

According to a report by McKinsey, some 36% of the United States workforce participate in some form of independent work. In many instances, self-employment follows the need for autonomy, flexibility, an opportunity to make more money, or to be responsible for a business.

These non-traditional work arrangements have some financial implications for your retirement planning. Once you are self-employed, you accept greater responsibility for your financial future.

Solo 401(k)

If you are a solopreneur or do not have any official employees, the solo 401(k), also known as a one-participant 401(k), is an option. In this case, it gives you the ability to contribute as an employer and employee. This dramatically increases your retirement savings potential. You have the capacity to contribute to your solo 401(k) plan as an employee and employer.

Contribution Limits for the Solo 401(k)

You can contribute a maximum of $22,500 as an employee in 2024. If you are over 50, you're allowed an additional $7,500 contribution. Since you are your employer, too, you can amass as much as 25% of your net self-employment income. Your overall contribution limit is $66,000, or $73,500 if you add catch-up contributions for a solo 401(k).

Pros:

• High contribution limits are ideal for saving aggressively for retirement.

• Flexibility in choosing between traditional (pre-tax) and Roth (post-tax) contributions.

Cons:

• The paperwork and maintenance can be more complex than other retirement options.

• Limited investment choices compared to IRAs.

SIMPLE IRA

The SIMPLE IRA is a retirement plan for small businesses with up to 100 employees. The Simple IRA is a straightforward plan that allows you and your employees to contribute to the IRA.

SIMPLE IRA Contribution Limits

In 2024, you could contribute up to $16,000 as an employee, with an additional $3,500 in catch-up contributions if you're 50 or older. The SIMPLE IRA allows a dollar-for-dollar match. You can contribute up to 3% of your employee's compensation. The other option is a flat 2% contribution for all employees from their employer.

Pros:

• Lower setup and administrative costs compared to a solo 401(k).

• Mandatory employer contributions can be an attractive benefit for employees.

Cons:

• Lower contribution limits than SEP-IRAs or solo 401(k)s.

• Employer contributions are required, which could financially strain some businesses.

Traditional IRA

A traditional IRA is a flexible option that allows almost anyone with earned income to contribute. Contributions in a traditional IRA are tax-deductible. As a tax deduction, this retirement account can help reduce your total taxable income for the year.

Traditional IRA Contribution Limits

You can add up to $7,000 to a traditional IRA in 2024. You are allowed an additional $1,000 in catch-up contributions if you're 50 or older. The total contribution is the same across both traditional and Roth IRAs.

Pros:

• Your contributions may be tax-deductible. Tax deductions will depend on your income bracket and whether you have access to an employer-sponsored plan.

• A traditional IRA gives you access to a variety of investment options. You can choose from stocks and bonds to mutual funds and ETFs.

Cons:

• Lower contribution limits compared to SEP IRAs and solo 401(k)s.

• Withdrawals are taxed as ordinary income. You must take out the required minimum distributions (RMDs) at age 73 or 75.

Roth IRA

A benefit of having a Roth IRA is that it allows you to make contributions with after-tax dollars. After-tax dollars help grow your money tax-free. You won't pay taxes on qualified withdrawals from a Roth IRA in retirement. A ROTH IRA is an option if you expect to be in a higher tax bracket once you reach retirement age.

Roth IRA Contribution Limits

Like the traditional IRA, you can contribute up to $7,000 to a Roth IRA. You can add $1,000 in catch-up contributions if you're 50 or older. There are income limits to qualify for a Roth IRA, so make sure you're eligible.

Pros:

• Tax-free withdrawals in retirement.

• No RMDs, allowing you to let your money grow as long as you want.

Cons:

• Contributions are not tax-deductible, so you don't get an immediate tax break.

• Income limits can restrict who can contribute to a Roth IRA.

• Defined Benefit Plan: The Self-Employed Pension Option

Health Savings Account (HSA)

An often-overlooked option for self-employed individuals and non-traditional employees is a Health Savings Account (HSA). While it's not strictly a retirement account, an HSA can play a significant role in your long-term financial planning due to its triple tax benefits:

• Contributions are tax-deductible.

• Growth is tax-free.

• Withdrawals for qualified medical expenses from your account are also tax-free.

HSA Eligibility Requirements

Make sure that you enroll in a high-deductible health plan. Your health insurance deductible must meet a certain threshold to qualify for a health savings account. The IRS defines an HDHP for 2024 as any plan with a minimum deductible of $1,600 for individuals or $3,200 for families.

HSA Contribution Limits

You can contribute up to $4,150 with an individual high-deductible plan. If you're at least 55, you can make a catch-up contribution of $1,000 to your HSA.

Pros:

• Triple tax benefits: contributions, growth, and withdrawals for medical expenses are all tax-free.

• Unused funds roll over year-to-year with an HSA. After you turn 65, you can access your HSA funds without worrying about a non-medical expenses penalty (though you'll pay taxes like a traditional IRA).

• You can invest the HSA funds in stocks, bonds, or mutual funds, allowing the balance to grow over time.

Cons:

• You need insurance and a high-deductible health plan to be eligible for an HSA. For that reason, a health savings account may not be the best choice for everyone.

• If you withdraw funds for a non-medical expense from your HSA before you turn 65, you'll pay a 20% penalty in addition to regular income tax.

Why Consider an HSA for Retirement?

If you have medical expenses in retirement, an HSA can be an incredibly tax-efficient way to cover your healthcare costs. Plus, after age 65, an HSA can function similarly to a traditional IRA. An HSA is a versatile option to consider for your retirement strategy.

As you age, healthcare costs become more expensive. That is just a fact of life. Healthcare is already expensive in the United States. An HSA can help you better cover medical costs after age 65.

I know from personal experience the cost of healthcare, from yearly doctor visits to multiple eye surgeries. The costs associated with healthcare, from health insurance to annual checkups and surgery, can quickly eat away at your savings and put you into medical debt.

Summary

You have multiple options if you are self-employed. These five types of retirement accounts for the self-employed can help you plan for your retirement. No matter if you are self-employed, a solopreneur, or are scaling a business, know that you have options to prepare for your financial future. Your future self will appreciate the financial security later in life.

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Views expressed in this article are the author's opinions and views and do not reflect the views of Secure Single. It is intended for informational and educational purposes only. Secure Single does not give health, medical, relationship, travel, or financial advice. Secure Single does not provide advice of any kind. Always consult and speak with a professional.