Planning for retirement can feel overwhelming, especially if you’re self-employed. Unlike traditional employees, self-employed individuals do not have access to employer-sponsored retirement plans like 401(k)s. Fortunately though, there are plenty of options available to help you build a comfortable nest egg. If you are in Arizona, here are the different retirement plans for the self-employed, to help you make an informed decision:

SEP IRA (Simplified Employee Pension Individual Retirement Account)

The SEP IRA is one of the popular retirement plans for self-employed individuals due to its simplicity and high contribution limits. It allows you to contribute up to 25% of your net earnings from self-employment.

• The maximum contribution limit is up to $61,000 (for 2024).
• This high limit makes it an attractive option for those who want to save a substantial amount for retirement.

For example, let’s say you’re a freelance graphic designer in Phoenix, Arizona, with a net income of $80,000. You can contribute up to 25% of your earnings, which equals $20,000. This contribution is tax-deductible. Therefore, it can lower your taxable income for the year, potentially saving you money on taxes.

Furthermore, one of the key benefits of a SEP IRA is its flexibility. So, if you have a great year and earn more than expected, you can contribute more. On the other hand, if your income is lower, you can contribute less or skip contributions altogether without penalties.

Solo 401(k)

The Solo 401(k), also known as an Individual 401(k), is another excellent option for self-employed individuals, especially for those who want to maximize their retirement savings. Unlike a traditional 401(k) plan offered by employers, a Solo 401(k) is designed for business owners with no employees (other than a spouse).

• With a Solo 401(k), you can make both employee and employer contributions. 
• As an employee, you can contribute up to $22,500 (for 2024), with an additional catch-up contribution of $7,500 if you’re over 50. 
• As an employer, you can contribute up to 25% of your net earnings from self-employment, up to a combined total of $66,000 (or $73,500 if you’re over 50).

For example, imagine you’re a self-employed writer in Tucson, Arizona, earning $100,000 a year. You can contribute $22,500 as an employee and an additional $25,000 (25% of your net earnings) as an employer. This totals $47,500, significantly boosting your retirement savings while reducing your taxable income.

SIMPLE IRA

A Savings Incentive Match Plan for Employees (SIMPLE) IRA is a straightforward and low-cost retirement plan. This is ideal for small business owners and self-employed individuals. 

• The contribution limits are lower than those of SEP IRAs and Solo 401(k)s.
• It offers the advantage of mandatory employer contributions.
• You can opt to pay as a matching contribution or a fixed percentage of employee compensation.

For 2024, you can contribute up to $15,500, with a catch-up contribution of $3,500 for those aged 50 or older. Employers (including self-employed individuals) must either match employee contributions. It can be up to 3% of compensation or contribute a fixed 2% of compensation regardless of employee contributions.

For example, consider you’re a self-employed real estate agent in Scottsdale, Arizona, with an income of $60,000. You can contribute $15,500. In addition, if you choose to match your contribution, you can add up to 3% of your earnings, totaling $17,300.

Traditional and Roth IRAs

Individual Retirement Accounts (IRAs) are another option for self-employed individuals. While IRAs have lower contribution limits than SEP IRAs or Solo 401(k)s, they offer unique tax advantages. 

• Traditional IRAs provide tax-deferred growth, meaning you pay taxes on your withdrawals during retirement. 
• In contrast, Roth IRAs offer tax-free growth, with contributions made after taxes, so you don’t pay taxes on qualified withdrawals in retirement.

For 2024, the contribution limit for both Traditional and Roth IRAs is $6,500, with an additional $1,000 catch-up contribution for those aged 50 or older.

Suppose you’re a self-employed yoga instructor in Flagstaff, Arizona, and want to diversify your retirement savings. You can contribute $6,500 to a Roth IRA, allowing your investments to grow tax-free. This is particularly advantageous if you expect to be in a higher tax bracket during retirement.

Considerations and Tips

When choosing a retirement plan, consider the following:

• Your current income
• Projected future earnings
• Tax situation
• Level of administrative complexity

For instance, a Solo 401(k) offers high contribution limits but requires more paperwork and record-keeping than a SEP IRA. Moreover, Arizona doesn’t impose an estate tax, which can be beneficial for your retirement planning. However, it helps to stay informed about federal tax laws. Also, consulting with a financial advisor can help tailor your retirement plan to your specific needs.

Being self-employed comes with many perks, such as flexibility and the ability to set your own schedule. However, it also means that you are solely responsible for your financial future. Without a structured retirement plan, it’s easy to overlook the importance of saving for the long term. By planning ahead, you can secure a bright and stress-free future, allowing you to focus on what you love without worrying about your financial security. The key is to start saving early and consistently. For more information on retirement plans for the self-employed, refer to reputable sources such as the IRS website and financial institutions like Fidelity and Vanguard. These organizations provide detailed guides and tools to help you choose the best plan for your needs.