September 27, 2019 Financial Management en_US Learn about your retirement plan options as a self-employed business owner. Read about maximizing your investing dollars by using IRA accounts. Can I fund a retirement plan if I'm self-employed?
Financial Management

Can I fund a retirement plan if I'm self-employed?

By Ken Boyd September 27, 2019

Do you have a retirement plan?

Many self-employed people do not, and the number of self-employed workers is increasing.

Pew Research notes that the IRS reported 25.5 million nonfarm sole proprietors in 2016. The total was based on the number of tax returns filed using Schedule C (profit of loss from a business).

Self-employment is becoming more popular. AARP reports that the US may see a sharp increase in growth over the next few years.

Being your own boss, however, can feel overwhelming.

You wear a number of hats in the business, and retirement planning may not be on your radar screen. A recent study quoted in Barron’s found that only 40% of self-employed respondents expected to receive a portion of retirement income from a retirement plan.

With proper planning and self-discipline, you can fund a retirement savings account with self-employment income. When you fund a retirement account, you reap the benefits of tax-deferred investing.

Meet Julie, who is starting a retirement plan

Julie owns Impact Design, and she works as a self-employed graphic designer. She generated $70,000 in income last year, and is considering her retirement plan options.

Retirement plans offer these benefits:

Investment choices

You can invest in individual stocks and bonds, or decide to put your dollars into mutual funds. Investors can choose from dozens of investment strategies to diversify their portfolios and limit risk.

Tax deferrals

The dollars invested into most retirement plans are not taxed until the money is withdrawn. If Julie’s annual contribution is $2,000, no taxes are deducted, and the entire dollar amount is invested.

Tax deferral provides a huge savings incentive because the investor can take advantage of compound interest. When interest compounds, the investor earns a return on both the original amount invested and prior year earnings.

Here’s an example: Julie invests $2,000 in mutual funds, and earns a 6% return in years one and two. Here are Julie’s earnings, assuming that the interest compounds:



Rate of return

Annual earnings

1 $2,000 6% $120
2 $2,120 6% $127.20

In year two, Julie invests the original $2,000, plus the $120 year one earnings. She earns 6% on a larger investment amount, and earnings total $127.20 in year two.

If Julie did not compound interest, she would only earn $120 in year two. Small business owners who invest in retirement plans can accumulate larger account balances by using tax deferral.

A portion of your contributions may also be tax deductible.

Business deduction

Income from most small businesses is reported on Schedule C, which is filed with the owner’s personal tax return. Many retirement plans allow business owners to deduct retirement plan contributions as a business expense.

A matching contribution, however, is the most valuable retirement plan benefit.

Employer and employee contributions

If a retirement plan offers a savings incentive match plan for employees, the company invests retirement plan dollars based on the worker’s contributions.

Julie previously worked as an employee for a publishing company. The firm matched Julie’s retirement plan contributions, up to 3% of her salary.

In 2017, Julie invested 3% of her $50,000 salary by using salary deferrals. Each month, the company contributed Julie’s wages into a retirement plan and matched her contributions.

The total contributions for 2017 were $1,500 from Julie, and a $1,500 match from her employer.

Some retirement plans allow self-employed workers to contribute both employer and employee contributions into a plan. The employer contributions are considered a business expense, and far more dollars are invested over time.

Investing through a retirement matching program may be the most valuable personal finance decision you will ever make. You can accumulate a much larger account balance over time, and you receive a tax break on all contributions.

There are a number of plans to choose from. If you’re a sole practitioner with no employees, a one-participant 401(k) plan may be right for you.

Solo 401 plan

A solo, or one-participant, 401, covers a business owner with no employees, or the owner and his or her spouse.

You can make contributions as both an employer and an eligible employee. The employer contributions are called elective deferrals.

Elective deferrals

You can contribute up to 100% of your earnings from self-employment, up to the annual contribution limits:

  • For tax year 2019, you can contribute up to $19,000.
  • If you are age 50 or older, the contribution limit is $25,000.

The higher contribution limits are called catch-up contributions. The catch-up rules help older workers speed up their investing plan for retirement.

Employee portion of contributions

Non-elective contributions are the dollar amounts you contribute as an employee.

To calculate your total contributions, you need to know your earned income. In this case, earned income is defined as:

(Net earnings from self-employment) less (one-half of your self-employment tax) less (plan contributions for yourself)

If you want to use a solo 401, ask a CPA to help you with the contribution limit calculation. You can find more information in Chapter 5 of IRS Publication 560, “Retirement Plans for Small Business..

A simplified employee pension is another investing choice for business owners.


You make contributions to an individual retirement account, or a SEP-IRA. Investors submit contributions to the financial institution that maintains the pension plan.

For tax year 2019, the maximum contribution is the lessor of 25% of your earnings, or $56,000.

Business owners receive a tax deduction for each IRA contribution. However, you must refer to Chapter 5 of IRS Publication to calculate the deduction. The experts at QuickBooks® can help you with the calculation.

Another type of retirement account is a SIMPLE IRA.


Using a SIMPLE plan is similar to investing in a traditional IRA account.

Self-employed individuals can fund a SIMPLE IRA, based on their earned income for the year.

The contributions limits are similar to the rules for Solo 401s and SEP-IRAs.

The IRS states that: “A SIMPLE IRA can’t be a Roth IRA. Contributions to a SIMPLE IRA won’t affect the amount an individual can contribute to a Roth or traditional IRA.”

Your retirement plan options may also include traditional IRAs and Roth IRAs. This is often the case for small business owners who fund a retirement plan up to the contribution limit, and have more dollars to invest.

Traditional and Roth IRAs

Contributions to a traditional IRA may be fully or partially deductible. Your tax deduction depends on your total income and other factors. Investment earnings grow in your IRA account on a tax-free basis, and you pay income tax when you withdraw dollars at retirement.

Finally, contributions to a Roth IRA are not tax deductible, but you can leave investment dollars in a Roth account for as long as you live.

You’re busy running a business, and it may be difficult to know how to invest for retirement.

What to do next

You work hard to generate an income, and you should take advantage of your retirement plan choices.

Use QuickBooks Self Employed to calculate your business profit. Their experts can help you understand your investment options and the contribution limits. Meet with a financial advisor to make informed investment decisions.

You deserve a well-funded retirement plan. Ask for help so you can reach your goal.

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Ken Boyd is the Co-Founder of, and owns St. Louis Test Preparation ( He provides blogs, videos and speaking services on accounting and finance. Ken is the author of four Dummies books, including Cost Accounting for Dummies. Read more