Many people have side businesses generating income that can be used as a funding source for retirement planning. This is especially advantageous if you have a side business but no retirement plan through your primary employment.

But there are ways to increase funding of your retirement plans even if you are covered on your job. In addition, funding a retirement plan with side income is a way of converting a current business activity into a long-term benefit with the potential to provide for you for the rest of your life.

Retirement Account Options for Self-Employed and Freelance Workers

Some people use their side income to accelerate debt payoff or increase their savings. For the best long-term benefit, consider sticking as much as possible of the money you earn on the side into a retirement account. Here are five options to consider (all contribution limits current as of 2018 and 2019—remember that you can contribute to a 2018 retirement account through April 15, 2019):

1. Traditional Individual Retirement Account (IRA)

Even if you are covered by a retirement plan through your main employment you may still be able to take set up a Traditional IRA. Contribution limits are $5,500 per year ($6,500 if you’re 50 or older) for 2018 and rise to $6,000 ($7,000 for 50+) in 2019. A single taxpayer covered by an employer plan can take a full IRA deduction with a modified adjusted gross income (AGI) of up to $63,000 in 2018 and $64,000 in 2019. After hitting this income level, the deduction phases out until—at $73,000 for 2018 and $74,000 for 2019—it’s gone completely. For married couples filing jointly, the phaseout begins at $101,000 for 2018 and $103,000 for 2019, and is gone completely at $121,000 for 2018 and $123,000.

However you can still make an Traditional IRA contribution if your total income exceeds these limits. In this case, the contribution itself won’t be tax deductible, but the earnings on it will accrue on a tax-deferred basis until withdrawals begin at retirement. Any withdrawals from the plan will be subject to taxation and a 10 percent penalty if the money is taken prior to turning 59½. But any contributions made that were not tax deductible will not be subject either to tax or to the penalty. Withdrawals (required minimum distributions) are mandated beginning when you turn 70½.

2. Roth IRA

As with a Traditional IRA, you can contribute up to $5,500 per year ($6,500 if you’re 50 or older) in 2018 and $6,000 ($7,000) in 2019, but Roth IRAs are fundamentally different in that contributions aren’t tax deductible and won’t reduce your taxable income. Because of this, they can be withdrawn at any time (even before retirement) without being subject to tax or penalty. Only the earnings on your contributions will be subject to tax/penalty if they are withdrawn early.

Roth IRAs have no required minimum distributions during the lifetime of the account holder so you will never be forced to start withdrawing the funds. Just as with IRAs, contributions are determined by modified adjusted gross income (MAGI). But unlike IRAs, if you exceed these limits, you cannot make a Roth IRA contribution at all. For 2018, for single taxpayers, eligibility begins to phase out at an MAGI of $120,000 ($122,000 for 2019), and is gone completely at $135,000 ($137,000 for 2019). For married couples filing jointly the phase out begins at $189,000 ($193,000 for 2019) and disappears fully at $199,000 ($203,000 for 2019).

Contributions to a Roth IRA must be reduced by any contributions made to a traditional IRA in the same year. However, you can contribute to a Roth IRA even if you have another retirement plan, such as a Simple or SEP IRA, as will be explained below.

See Roth IRA contribution limits and Roth IRA income limits for up to date information.

3. Simple IRA

The Simple—or Savings Incentive Match Plan for Employees—can be used for a sole practitioner or for a small business with 100 or fewer employees. For 2018, the maximum contribution is $12,500 per person for ($15,500 if you’re 50 or older) but it cannot be used if you’re covered under another retirement plan (other than a Roth IRA). That means for those under age 50, you can set aside $12,500 in a Simple IRA and $5,500 with a Roth IRA bringing your total annual retirement savings to $18,000. The figures for 2019: $13,000 per person for the Simple IRA and $6,000 for the Roth for a maximum of $19,000. Remember that for both years, if you’re 50 or older, you can add the additional $1,000 catch-up contribution for the Roth IRA and $6,000 for the Simple IRA.

One of the more flexible aspects of a Simple IRA is that you can elect to contribute based either on a percentage of income or on a flat dollar amount. However, if you have any employees at all, you will generally be required, as an employer, to provide a matching contribution on a dollar-for-dollar basis equal up to 3% of their wages. Alternatively, you can contribute 2 percent of each eligible employee’s compensation (up to that percentage of $275,000 for  2018 and $280,000 for 2019) whether or not the employee contributes.

If you have a small freelancing gig and never plan to hire employees, this shouldn’t be a problem. One caveat: Simple IRAs generally require that you earn $5,000, so if your side income is minimal, this plan may not work for you.


This is one of the simplest retirement plans to set up and only requires $600 in income to participate. As a self-employed businessperson, you can contribute the lesser of up to 25 percent of your earnings up to a maximum of $55,000 for 2018 and $56,000 in 2019.  The contribution must come from business income, but if you earn that much you could set aside $55,000 in a SEP IRA and an additional $5,500 in a Roth IRA for a total of $60,500 set aside for retirement in 2018. In 2019, the figures rise to $56,000 plus $6,000, for a total of $62,000. Special rules apply for sole proprietors so be sure that you check these general figures carefully with an accountant or tax attorney.

You can have a SEP even if you’re covered by a defined contribution plan—usually a 401(k)—on your full-time job.

Since 401(k) employee contributions top out, for 2018, at $18,500 ($24,500 if you’re 50 or older)—and IRAs and Roth IRAs at $5,500 ($6,500 if you’re 50 or over)—you should have plenty of room to accommodate the SEP contribution. In 2019, the top figures are $19,000 for 401(k) employee contributions ($25,000 if you’re 50+) and $6,000 for IRAs ($7,000 for 50+).

5. Solo 401(k)

A Solo 401(k)—the IRS calls it a one-participant 401(k)—is a bit more complicated to set up, and you have to be sure you qualify. You must own a business (whether sole proprietor, S Corp, and so on), and you can only set aside money for you, your spouse and a partner in the partnership. If you have part-time employees who work more than 1,000 hours in a year, you cannot use this account.

However, if you meet the requirements, you can put back a lot of money for retirement. Solo 401(k)s have the same contribution limit as a traditional 401(k)—$18,500 in 2018, $19,000 in 2019—plus, as the employer you can kick in an additional 25 percent of your pay based on your W2 wages. The total amount you set aside for retirement with a Solo 401(k) can’t be more than $55,000 in 2018 and $56,000 in 2019 ($59,000/$60,000 if you’re eligible for the $6,000 401(k) catch-up contribution).

Don’t Waste Time

If you have a side business, are you taking advantage of any of these plans to enhance your current retirement plans? If you aren’t, now’s the time to start.


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