Tax Saving Retirement Vehicles For The Self Employed

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I have recently been diving into my studies to become an Enrolled Agent. Mainly because I have received quite a few questions with regards to taxes and tax preferred vehicles for retirement. There are a few out there and each with a unique set of rules that can help a self-employed person save on taxes today and defer them until they are in a lower tax bracket. So I thought I'd give a quick overview on some of the most commonly used tax saving retirement vehicles for self-employed individuals below.

Solo 401(k)

A Solo 401(k) is ideal for entrepreneurs who does not have any employees or has an employee who is their spouse and is a high income earner. As an employee, this savings vehicle allows a person to save up to $18,000 as an employee plus a $6,000 catch up if you are over 50 years of age. As the employer, you can also contribute and deduct up to 25% of the employee's salary (whatever you pay yourself). Under the right circumstances, you can deduct and defer taxes up to $54,000 in 2017.

Tip: This vehicle is commonly used by solo practitioners such as doctors, attorneys, consultants. However, once you employ someone other than your spouse, this savings vehicle must be converted to a traditional 401(k) which comes with some added cost and complexity.


The SEP IRA is another commonly used retirement vehicle used by self-employed individuals. This retirement vehicle allows the person to defer the lesser of 25% of your net business income or $54,000. If you have employees, you must also open an account for them as well and contribute the same percentage to their account as you do your own. Unfortunately, there is no catch up amount for this savings vehicle, but it is simple to set up.

Tip: When using this savings vehicle, it is important for your tax preparer to have communication with your financial advisor. This will reduce miscommunication as to what "net business income" is and avoid over contributions that come with a penalty.


The SIMPLE IRA is not as commonly used as the previously mentioned retirement vehicles. It allows up to $12,500 to be contributed with a catch up of $3,000 for anyone that is 50 years of age or older. Unlike the previously mentioned savings vehicles, generally the SIMPLE IRA does require the employer to match 3% of the employees compensation. Typically, startup companies with variable cash flow stay away from this vehicle because of the required match.

Tip: I consider this the middle ground between a 401(k) and a SEP IRA. This allows the employee to defer money to their discretion while the employer doesn't have to commit a high percentage of contribution to each employee.


The most famous out of all of these is the IRA, the Individual Retirement Account. One can save up to $5,500 in this account and it has a catch up provision that allows anyone over the age of 50 to add $1,000 more. A person or their spouse must earn at least $5,500 to max out the contributions to this retirement account. However, depending on a person's income, there are limitations to how much is deductible. This is the easiest account to set up and is normally recommended to anyone who does not intend to save more than $5,500 annually and is within the income limits to fully deduct the full contribution.

Tip: Depending on an individual's income or couple's income, they may qualify for the Saver's Credit. If you are someone that just entered the workforce or has re-entered the workforce and have some extra income to save, this could be a great way to lower your tax bill.

Health Savings Account (HSA)

Nobody really looks at a Health Savings Account as a retirement vehicle but this could be a great vehicle for a self-employed individual to defer taxes. First, unlike the previously mentioned accounts, the HSA allows a self-employed person avoid SE taxes AND federal income tax. Also, if the amounts distributed are for qualified medical expenses, the distribution would be tax free! The little known secret is that after the age of 65, you can use these funds for ANYTHING!

Tip: Many people don't know that after these accounts reach a certain balance, they can be invested just like any other investment account. Investing these funds can help the balance keep pace with inflation, especially if they'll be used for healthcare.


MyLife Financial is a fee-only financial advisory firm providing objective and independent advice virtually. Our clients are busy professionals that face daunting questions of how today's financial decisions will affect their long-term financial success. Everything written is strictly for informational use only. Please seek the advice of your CPA, Attorney, or financial professional before implementing any strategies.

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