Retirement Plans for Independent Contractors

Keep thorough retirement account records for easier tax planning.

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If you think working as a freelancer limits your ability to contribute to a tax-advantaged retirement plan, think again. Independent contractors have a variety of investment plan options that can help them save for retirement. Consult an accountant before opening starting plan. Review your long-term financial goals and you'll be well on your way to enjoying a more secure retirement.

Simplified Employee Pension

A simplified employee pension plan is free and easy to set up at most banks and investment companies. As of 2012, independent contractors of any age who don't have employees can contribute up to 25 percent of their annual income to a SEP-IRA, up to $50,000. According to, you can open a SEP account as late as the extended due date of your federal income tax return.

Solo 401(k)

Independent contractors can establish a solo 401(k) account. This may be a good option if you plan to contribute more than $50,000 a year to your retirement plan. The Internal Revenue Service allows annual contributions up to $17,000, plus an additional 20 percent of your business income, capped at $50,000. Self-employed individuals who are 50 years old or older can contribute $22,500, plus 25 percent of business income, also capped at $50,000. However, solo 401(k) plans typically cost more money to set up and maintain than SEP accounts. Also, if your account exceeds $250,000, you'll need to file a separate tax return for the plan.

Defined-Benefit Plans

Defined-benefit plans are the most complicated and expensive to establish and administer. They are also the least flexible and require minimum contributions, which a financial planner will calculate for you. The primary appeal of a defined-benefit plan is its guaranteed payout, which account owners begin receiving at retirement. In addition, you can make large contributions to the plan -- a useful feature if you're making enough money.

Simple IRA

Not every independent contractor makes enough money to warrant setting up a solo 401(k) or a defined-benefit plan. If you want to contribute more than 25 percent of your income, consider establishing a simple IRA. Although 2012 limits only let you contribute $11,500 annually -- or $14,000 if you're 50 or older -- if you earn less than $50,000, this option is worth considering. Whichever plan you choose, start saving early. The earlier in life you invest, the more secure your retirement could be.