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Introduction
People are quitting their day jobs in record numbers to become full-time, self-employed content creators—many of which earn more than six figures annually. There are undeniable benefits to being your own boss. But there are trade-offs too, and one of them is figuring out how to save for retirement.
Many Americans with traditional jobs have the convenience of an employee-sponsored 401(k) that’s automatically deducted from their paychecks. However, saving for retirement isn’t so clear-cut if you make a living on YouTube, Twitch, or OnlyFans.
The good news is that you have plenty of solid options. In this article, we’ll break down five retirement plans for self-employed creators to help you decide what might work best to achieve your goals.
1. Traditional IRA
An IRA (individual retirement account) is a long-term savings account designed primarily for self-employed people. IRAs are probably the easiest way for self-employed creators to start saving for retirement.
Advantages:
- Contributions are tax-deductible on your state and federal tax returns for the year you make your contributions.
- You can roll over your old 401(k) from an employer into a traditional IRA.
Disadvantages:
- If you withdraw money from a traditional IRA before age 59½, you have to pay taxes and a 10% early withdrawal penalty.
Contribution Limits:
- $6,500 ($7,500 if you are over age 50)
Ideal For:
- Creators who recently became self-employed
How to get started:
- You can open an IRA through a bank, investment company, online brokerage, or a personal broker
2. Roth IRA
A Roth IRA is similar to a traditional IRA, but the main difference is how they work with taxes. Unlike a traditional IRA, your contributions to a Roth IRA are not tax deductible. On the flip side, you won’t have to pay taxes when you withdraw the money during retirement.
Advantages:
- You don’t pay taxes on withdrawals from your Roth IRA during retirement
Disadvantages:
- Creators making more than $153,000 per year aren’t eligible for Roth IRAs
Contribution Limits:
- $6,500 ($7,500 if you are over age 50)
Ideal For:
- Creators who expect to be in a higher tax bracket when they start taking withdrawals
How to get started:
- You can open a Roth IRA through a bank, investment company, online brokerage, or a personal broker
3. SEP IRA
A simplified employee pension (SEP) IRA is designed specifically for small business owners, rather than part-time freelancers. The main advantage of a SEP IRA is that it allows you to contribute way more money than a traditional or Roth IRA.
Advantages:
- Much higher contribution limits than a traditional or Roth IRA
- Can be combined with a traditional IRA or a Roth IRA
- Contributions are tax-deductible
Disadvantages:
- If you withdraw money from a SEP IRA before age 59½, you have to pay taxes and a 10% early withdrawal penalty.
Contribution Limits:
- Up to 25% of your compensation or $66,000 for 2023 (whichever is less)
Ideal For:
- Self-employed business owners
How to get started:
- You can open a SEP IRA through an online brokerage (it just requires a little extra paperwork)
4. SIMPLE IRA
SIMPLE IRA stands for “Savings Incentive Match Plan for Employees.” This type of IRA is designed for small businesses with 100 or fewer employees, but sole proprietors and self-employed people are eligible too.
SIMPLE IRAs can be an ideal option if you hire full-time employees for your creator business and want to offer them a retirement plan.
Advantages:
- Contributions are tax-deductible
Disadvantages:
- Contribution limits are lower than a SEP IRA or solo 401(k).
- Employers are usually required to make matching contributions to employee accounts of up to 3% of employee compensation or fixed contributions of 2% to all eligible employees.
- If you withdraw money from a SEP IRA before age 59½, you have to pay taxes and a 10% early withdrawal penalty.
Contribution Limits:
- Up to $15,500 in 2023, plus catch-up contribution of $3,500 in 2023
Ideal For:
- Small business owners with 100 or fewer employees
How to get started:
- You can start a SIMPLE IRA through an online broker
5. Solo 401(k)
A solo 401(k) is a retirement plan for one-person businesses with no full-time employees. It has most of the same perks as a traditional 401(k) like tax-deferred growth. The only downside is that you don’t have an employer matching your contributions, since you’re employed by…yourself.
A solo 401(k) is also called a one-participant 401(k) or a solo K.
Advantages:
- Higher contribution limits than SEPs, traditional IRAs and Roth IRAs, or SIMPLE IRAs
- Contributions reduce your taxable income in the year you make them
Disadvantages:
- There are taxes and penalties if you withdraw the money before you’re 59 ½
- Solo 401(k)s takes longer to set up than IRAs
Contribution Limits:
- You can make contributions as an employer and employee with a solo 401(k)
- As an employee, you can contribute up to 100% of your net adjusted self-employed income, or $22,500 in 2023 (whichever is less).
- As an employer, you can contribute up to 25% of your net adjusted self-employed income.
Ideal For:
- Business owners without full-time employees who want to make large contributions to their retirement fund
How to get started:
- You can open a solo 401(k) at many online brokers. Just make sure your business is incorporated since you need an Employer Identification Number (EIN).
How Much Should You Save For Retirement?
As a general rule of thumb, try to stash away 10-15% of your pre-tax income for retirement. If you expect to make $100,000 this year, that means saving at least $10,000 per year, or about $800 per month.
There is no one-size-fits-all when it comes to planning for retirement. But regardless of your goals, the earlier you start the better.
Pay Yourself First
It might be hard to imagine stashing away money you won’t touch until you’re 60 years old. But setting up a retirement plan early is a great way to ensure work is optional (not mandatory) in your golden years.
Chances are you’d rather spend more time creating and less time figuring out your finances. That’s where Karat Books comes in. Our team of professionals can help you decide which retirement plan(s) work for you and how much to contribute.
