how to invest when you're self-employed

retirement investing strategy for entrepreneurs

Entrepreneur life can be great.

You set your own schedule.

Can live in sweatpants and your old college sweatshirt.

Are in charge of how much you make and what your business becomes.

Never have to leave the house on snow days.

Work with whomever you want.

Don’t have to wash your hair for 3 days without having someone viciously judge you.

The list goes on and on.

But one perk of the corporate world that entrepreneurs miss out on?

Benefits. Like those matching retirement contributions most employers provide.

While it seems like 401(k)s are more popular than Instagram pics of Starbucks cups (oh, hey, Pumpkin Spice Latte…I see you’re back), the data shows otherwise. In fact, over 31% of American households don’t have access to a plan like a 401(k) to save for retirement. And a majority of those are most likely made up of people just like you.

The wild ones. Creatives. Risk takers. Uber successful entrepreneurs kicking a$$ and taking names.

But just because you’re rolling in the dough now doesn’t mean that you shouldn’t give thought to your own retirement. This still needs to be a priority for you just like it was back in your days when you played Corporate Barbie for 9 hours a day, 5 days a week.

Thus, I’ve put together a retirement savings strategy for those of you who are self-employed and not offered the benefits of an employer-sponsored plan. Even without a 401(k), you have plenty of options, and I’ve laid them all out for you PLUS given you a step-by-step guide on exactly how to go about investing so that you’re not stuck working until your 90s. Unless, you know, you’re into that kind of thing.

So go ahead and dive in, lady boss. Your future gold mine is waiting for you.

THE SELF-EMPLOYED 401(K) EQUIVALENT

Luckily for the self-employed, the government decided to throw you a bone (or 3) and set up plans similar to the 401(k). Each has its own pros and cons, so please read through each carefully and decide which is the best fit for you.

SEP IRA

Who Qualifies: Individuals who own their own business (even if they have a full-time job!) in a sole proprietorship, partnership, S-Corp, or C-Corp

The Basics: This acts as a traditional IRA where you don’t get taxed until you take money out of the account in retirement. However, note this is different than a regular 401(k) in that only the employer can make contributions to the retirement plan, not the employee.

Why It Rocks: You can contribute much more to this than a regular traditional IRA, which is capped at $5,500 per year. Under a SEP IRA, you can contribute up to 25% of your income or $55,000 (2018 limit), whichever is less. Thus, if you make $50,000, you can contribute $12,500 each year.

Why It Can Suck: If you have employees, you must set plans up for them as well and contribute the same percentage across the board.

Who Should Use It: Those with no or only a handful of employees they would like to offer a retirement benefit to

SELF-EMPLOYED 401(K) 

Who Qualifies: Those who are self-employed or who own a business/partnership with no employees

The Basics: Both the employee and employer can make contributions to this plan, which can act as either a traditional (tax-deferred) or Roth (post-tax) fund. Employees are capped at $18,500 per year (2018 limit) while employers cannot contribute more than 25% of their earned income.

Why It Rocks: It has the same maximum annual contribution limit as the SEP IRA of $55,000 (2018 limit), but you have a higher likelihood of achieving it because both the employee (you) and employer (your company) can contribute. If you’re over 50, you also have the ability to make catch-up contributions (something not offered with the SEP) of an additional $6,000 per year.

Why It Can Suck: Paperwork. If the retirement plan assets get over $250,000, then you have to file an extra tax form with the IRS (Form 5500).

Who Should Use It: Those with no employees or who are older than 50 who want either a Roth elective or wishing to invest up to the max

SIMPLE IRA

Who Qualifies: Those who are self-employed or have small businesses with fewer than 100 employees

The Basics: Just like a self-employed 401(k), both the employee and employer can contribute money to the plan, which can act as a traditional (tax-deferred) or Roth (post-tax) fund. Employer portions are limited to a 3% matching contribution or a 2% non-elective contribution (meaning they give it to everyone, regardless of whether they choose to participate or how much they put in).

Why It Rocks: For small businesses with less than 100 employees, it’s a great alternative to putting a 401(k) in place

Why It Can Suck: Employee contributions are limited to $12,500 per year, which is significantly less than the maximum you can contribute under the SEP IRA or Self-Employed 401(k).

Who Should Use It: Those with small businesses that have between 10 & 100 employees

CONTRIBUTE THE MAX TO YOUR ROTH IRA

Alright, you’ve got your company plan in place. Now what?

Well, take a good luck at your business and see how much you want to contribute through one of the three previously-mentioned options. Because any contributions you make on behalf of the company are tax-deductible, you may want to funnel quite a bit through one of these self-employed plans. If you’re in the 25% tax bracket, a $10,000 contribution made on behalf of your company will save you $2,500. Not too shabby, right?

When you reach the contribution limit of what your business can support or the threshold the law dictates, your next move is to contribute up to the max in your Roth IRA.

Now what is a Roth IRA?

Essentially it’s a folder to house investments, just like a traditional IRA or 401(k), except with different benefits.

With a Roth IRA, you initially contribute with post-tax dollars but any earnings you make off those dollars are never taxed. In addition, any money you contribute can be taken out at any point, even before the retirement age date, without penalty.

It’s a great benefit, although one I wouldn’t take advantage of if I were you. If you put it there, park it there.

Because this is entirely separate from what you do within the company, what you contribute to your business-sponsored plan has no effect on the amount you can put in your Roth IRA. Thus, you have the opportunity to invest an additional $5,500 (2018 limit) in the market. Um, yes please.

INVEST OUTSIDE THE MARKET

Obviously investing in your own business is a smart move (if you’re investing in those things that will bring a high return), especially if you can leverage that money (via outsourcing, improved efficiency, or increased sales/marketing) to exponentially grow .

However, it doesn’t need to stop there.

There are always businesses that need investors, and if throwing more money at the stock market doesn’t interest you, being an investor in someone else’s dream might.

Or do what I did and start another business. I went into real estate, and right now, own 2 properties that bring in over $1,000 extra per month. (Can I get a whoop whoop?!?)


And there you have it: the best investment strategies you can use to build a brighter future without having a 401(k). It’s surprising how many options are actually out there for you to take advantage of, isn’t it? Shout out to Uncle Sam for not forgetting about the hustlers.

As always, if you have any questions, feel free to shoot me an email or ask away in the comment section below. And for all of you that don’t have access to a 401(k), inquiring minds (i.e. me) would love to know:

What options are you currently taking advantage of to save for retirement?