HACK 204 Work for Yourself? Don’t Forget to Save

Just because you don’t have access to an employer-sponsored retirement account doesn’t mean you can’t invest with similar tools. There are a few retirement accounts available especially for you, and they’re easy to get through a regular investment brokerage like Charles Schwab or Vanguard.

• SEP IRA: SEP stands for Simplified Employee Pension. If you’re self-employed or have just a few employees, you can contribute up to 25 percent of your compensation or net self-employment earnings to a SEP IRA. You can deduct your contributions, but distributions are taxed as income when you withdraw money later.
• SIMPLE IRA: It’s called the Savings Incentive Match Plan for Employees, but you can open one if you’re self-employed too. You can contribute up to about $13,500 of your earnings pre-tax each year, but you must also contribute from your net self-employment earnings.
• Solo 401(k): If you’re self-employed and don’t have any other employees, you can open a solo 401(k), sometimes called an individual 401(k) or a one-participant 401(k) plan. It allows you to contribute pre-tax funds as both employee and employer. You can contribute up to $19,000 as an employee; on the employer side, you can contribute up to 25 percent of your compensation. And if you’d rather pay taxes now than later, you can open a Roth 401(k).

To get your “net self-employment income,” subtract your business expenses from your revenue. Then, multiply the answer by .9235 (92.35 percent) to find out your net income.