Retirement Accounts for the Self-Employed

There are many self-employed retirement options available to small business owners. It is important to carefully consider how much you need to retire in a comfortable manner. When you are self-employed you lose benefits such as employer matching contributions of 401(k) plans. Everything will fall on your shoulders. So, you should focus on saving for retirement.

Following basic retirement savings rules should help you reach your goals. Retirement options vary but you can find the process and the account that is right for you.

Traditional and Roth IRAs for the Self Employed

An older small business owner hanging an
These retirement plans are great for small business owners.

Jose Luis Pelaez Inc / Blend Images / Getty Images

The first account you may consider is a traditional or Roth tax-deductible IRA account. The biggest negative is the contribution limits set on an IRA account. You can set up an IRA at your local bank or through your broker. You will want to choose an account that earns a high rate of return to keep pace with the rate of inflation.

When choosing between a traditional IRA and a Roth IRA you need to realize that in a traditional account you are not taxed on your contributions. However, when you withdraw funds you will be taxed.

Conversely, the Roth taxes you on your contributions. So, this system allows you to withdraw your earnings in retirement without the impact of taxes. Since you will withdraw more than you contribute, it makes more sense to open a Roth IRA in most instances.

This account will likely not be your first option. You should consider the other retirement accounts available to you.

SEP Accounts for the Self Employed

Another option is the Simplified Employee Pension (SEP) plan. These plans are offered to small business owners to set up for their employees. However, sole proprietors may contribute themselves. With a SEP, you do not have to contribute the same amount every year, which allows you flexibility if you have a difficult year.

You should speak to a professional if you are interested in this account. There is a contribution limit associated with the account.

KEOGH Accounts for the Self Employed

You may also consider setting up a KEOGH account. This account is similar to a 401K. The amount you contribute depends on the plan you sign up for. The amount is set up and you must contribute that amount every year. This will help you to continually contribute to your retirement.

There are operating costs associated with this account since you do need an actuary to administer to the plan and your contributions each year. This is a taxed deferred savings plan.

Other Retirement Savings Options for the Self Employed

Additionally, you should plan to save for retirement outside of these tools. You may consider investing in stock, real estate, mutual funds or other investment options. It is important to diversify your portfolio. Once you have figured out how much you need to retire on comfortably, you should figure out the amount you need to contribute each month to reach that goal.

If you speak to a financial advisor they should be able to help you. As you make more money, you should contribute more to retirement.

The Balance does not provide tax, investment, or financial services and advice. The information is being presented without consideration of the investment objectives, risk tolerance or financial circumstances of any specific investor and might not be suitable for all investors. Past performance is not indicative of future results. Investing involves risk including the possible loss of principal.