3 Best Retirement Accounts for Self-Employed Creatives

Treyton DeVore
September 20, 2021

Investing for the long term is by far one of the most boring things to do.

But it's a necessity.

When you do so, you can experience the growth of the stock market and take advantage of tax benefits along the way. For us creators, it's tough to put away money for the future when putting that money towards the business could provide higher, more immediate returns.

However though, the key word is "could" - business results are never guaranteed. Returns in the stock market are also never guaranteed, but historically it's returned around 8%.

But figuring out which type of account to open can be challenging as they all have their own pros and cons so in this article, we're breaking down 3 of the best retirement accounts self-employed individuals can open:

Roth or Traditional IRA

Who it's designed for:

Individuals just getting started, investors looking to diversify amongst account types

Annual contribution limit:

$6,000 in 2021 ($7,000 for those over the age of 50)

The tax advantages:

The biggest difference between a Roth and Traditional IRA is when you receive the tax benefits.

For a traditional IRA, when you contribute, you can write off that year's contributions against your taxable income. You then have to pay taxes at retirement.

For a Roth IRA, you contribute money that has already been taxed. Then at retirement, you can withdraw the amount you invested, as well as all the earnings, completely tax-free (because you already paid taxes before you contributed the money into the account).

What to watch out for:

If you withdraw *earnings* from an IRA prior to age 59½, it's taxed as ordinary income plus a 10% penalty

How to open:

Both kinds of IRAs can be opened at standard online brokerages such as Vanguard, Schwab, or Fidelity

Also read: 5 Places to Open a Roth IRA (And Why You Should)

A quick overview:

The first thing to consider when choosing between a Traditional or Roth IRA is your income. Currently Roth IRAs have income limits of $140,000 for individuals and $208,000 for those who are married and file jointly. If you make more than those limits and want to contribute to a Roth IRA for the tax advantages, this can currently be done through a Roth conversion (though the Roth conversion could be eliminated if the American Families Plan is passed in full).

If your income doesn't make the decision for you, determining which account to open really comes down to your preference on when the funds are taxed.

For Roth IRAs, you contribute after-tax money and at retirement, you can withdraw the money tax-free. You can also withdraw your contributions (not any earnings) at any time without penalty because they would already have been taxed when you made the contribution. So it's almost like a glorified savings account that can be invested in the stock market - pretty cool.

For Traditional IRAs, you can receive a tax deduction on contributions in the current year and then at retirement, you have to pay taxes on withdrawals.

If you think you'll be in a higher tax bracket at retirement or that tax rates in general will go up over time, a Roth IRA might make the most sense so you can pay taxes at today's rate and no taxes in the future.

Solo 401(k)

Who it's designed for:

Self-employed individuals with no employees

Annual contribution limit:

In 2022, the contribution limit is $61,000 (add'l $6,500 if over age 50) or 100% of earned income - whichever is less

  • As the employee, you can contribute as you would to a standard employer-offered 401(k) where you can contribute 100% of your compensation or $20,500 - whichever is less.
  • As the employer, you can make an additional contributions up to $40,500 or 25% of compensation - whichever is less.

The tax advantages:

Just like the IRA's, there are both Traditional and Roth Solo 401(k)'s

Traditional 401(k): Contributions are made pre-tax, reducing your taxable income in the current year - withdrawals in retirement after reaching age 59 1/2 are taxed

Roth 401(k): Contributions are made with after-tax dollars, meaning no tax break in the current year - but at retirement, the money can be withdrawn completely tax-free

  • Employer contributions to the 401(k) are a tax deduction for the business

What to watch out for:

If you have full-time employees, you cannot contribute to a Solo 401(k)

How to open:

Solo 401(k)s can be opened at most standard online brokers - Schwab, Fidelity, Vanguard, MySolo401k - and you'll need to file paperwork with the IRS each year once the account value is more than $250,000

A quick overview:

The IRS allows one exception to the no-employees rule on the solo 401(k): your spouse. If he or she earns income from your business you can still have a Solo 401(k).

With its high contribution limits, the Solo 401(k) is a top choice for many self-employed people.

SEP (Simplified Employee Pension) IRA

Who it's designed for:

Employers (including self-employed individuals) with zero or few employees

Annual contribution limit:

$61,000 or 25% of net self-employment earnings (up to $290k of earnings) - whichever is the lesser amount

The tax advantages:

In general, you can deduct your contributions from the current year's income and withdrawals in retirement are taxed as income

What to watch out for:

If you have employees, you must contribute on their behalf and it must be equal to what you contributed for yourself

How to open:

A SEP IRA can also opened at standard online brokerages such as Vanguard, Schwab, or Fidelity

A quick overview:

SEP IRAs are relatively easy to set up, they have higher contribution limits than other IRAs, low admin costs, and allow employers to determine how much to contribute each year. Sole proprietors, partnerships, and corporations can start a SEP IRA and they're treated just like traditional IRAs for tax purposes.

In general, a SEP IRA is just like a traditional IRA except that employers can contribute to a SEP for an employee.

Author's Choice: Solo 401(k)

If we're speaking strictly traditional retirement accounts, it doesn't get much better than a Solo 401(k).

It has high contribution limits, both Roth and Traditional options, and provides flexibility in investment options.

IRAs are great, but they have relatively low contribution limits. However, you can have a Solo 401(k) and an IRA and take advantage of both.

Bonus: Taxable investment account

Outside of the tax-advantaged retirement accounts, you can use a standard taxable account to save more or to increase your flexibility. What I mean by this is that with retirement accounts, if you withdraw funds before traditional retirement age, you'll be penalized (typically 10%). With a regular taxable account, you can sell investments and take income at any time without penalty. This is important if you plan to pursue early retirement.

The only downside is that you don't get any tax breaks when you invest or when you withdraw like you do with the other accounts, but you do get favorable capital gains treatment depending on how long you hold the investment.

Overall, I'd use a taxable investment account if I already maxed out an IRA and contributed more than 50% of the max to either a Solo 401(k) or SEP IRA. These can be opened at places like Vanguard, Fidelity, Public, or M1 Finance.

The Takeaway

Investing for retirement isn't supposed to be flashy. It's a way to put your money to work for you over the years so it can experience the growth of the stock market.

You shouldn't frequently check retirement accounts. They're meant to grow in the background and when you have 20-30+ years until you need the money, the day-to-day or month-to-month performance shouldn't matter.

Get invested, automate your contributions, diversify and rebalance over time, and stay the course.

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