The pandemic forced many people to take on side jobs to fill in the income gap left by furloughs and unemployment caused by COVID-19. If you are one of the millions of freelancers, entrepreneurs, workers with a side gig—or an employee with no workplace retirement plan—you can still save for retirement. As long as you have some earnings, you have some tax-advantaged saving options.
You've probably heard of IRAs, short for individual retirement accounts. Anyone with earned income (including those who do not work themselves but have a working spouse) can open an IRA. There are a few different options, Roth and traditional. Each offers a tax benefit.
If you are self-employed or have income from freelancing, you can open a Simplified Employee Pension plan—more commonly known as a SEP IRA.
Who can open one? The SEP IRA is available to sole proprietors, partnerships, C-corporations, and S-corporations.
How it works Contributions to a SEP IRA may potentially be tax-deductible. If you have employees, you have to set up accounts for those who are eligible. Employees cannot contribute to the account; the employer makes all the contributions.
Contribution caps for SEP IRAs can vary each year between 0% and 25% of compensation, with a maximum of $66,000 in 2023. Each eligible employee must receive the same percentage.
Note that the rules on determining eligible compensation, which are different for self-employed and employee SEP participants, can be complex. Consult a tax expert or the IRS website for details.
Who it may help
This account works well for freelancers and sole entrepreneurs, and for businesses with employees (as long as the owners don't mind making the same percentage contribution for the employees that they make for themselves). The SEP IRA is generally easy and inexpensive to set up and maintain. Plus, there are typically no tax forms to file.
Things to keep in mind The deadline to set up the account is the federal income tax filing deadline.
- For more information, read on Fidelity.com: Understanding the SEP IRA
A self-employed 401(k), also known as a solo 401(k), can be an option for maximizing retirement savings even if you're not making a lot of money.
Who can open one? If you are self-employed or own a business or partnership with no employees you can open a self-employed 401(k). A spouse who works in the business can participate as well.
How it works You get 2 opportunities for contributing to a self-employed 401(k)—first as the employee, and again as the employer.
As the employee, you can choose to make a tax-deductible or Roth contribution of up to 100% of your compensation, with a maximum of $22,500 in 2023. Once you're over age 50, you can also make catch-up contributions—for 2023 you can save an extra $7,500, for a total of $30,000.
As the employer, you can contribute up to 25% of your eligible earnings. The employer contribution is always made before tax. (Again, consult a tax expert or the IRS website for details on computing eligible earnings.)
Who it may help These accounts give small business owners the opportunity to save a significant amount of money each year. The total that can be contributed for employee and employer in 2023 is $66,000, plus an additional $7,500 for people age 50 and over.
Things to keep in mind After the plan assets hit $250,000, you have to file Form 5500 with the IRS.
The deadline for setting up the plan is the end of the fiscal year, generally the last business day of the year. You can make employer contributions to the account until your tax-filing deadline for the year, including extensions.
- For more information, read on Fidelity.com: Understanding the Self-Employed 401(k)
Like a 401(k), this account offers tax-deferral and pretax contributions, plus an employee contribution and an employer match.
Who can open one? Anyone who is self-employed or a small-business owner can open a SIMPLE IRA. Small businesses with 100 employees or fewer can also open a SIMPLE IRA plan.
How it works Like the self-employed 401(k), you get 2 chances to contribute.
- As the employee, you can contribute up to 100% of your compensation, up to $15,500 in 2023.
- As the employer, you must either put in a 3% matching contribution or a 2% nonelective contribution. The latter is not contingent on the employee contribution, the way a matching contribution to a 401(k) typically is.
But be aware that a SIMPLE IRA can require the employer to make contributions to the plan even if the business has no profits.
Who it may help The SIMPLE IRA is an inexpensive plan for businesses with fewer than 100 employees. It also allows for salary deferrals by employees and there are no tax forms to file.
The SIMPLE IRA also allows those age 50 and over to save an additional $3,500 in 2023.
Things to keep in mind The deadline to set up the plan is October 1. You can make matching and nonelective contributions until the company's tax filing deadline—including extensions.
- For more information, read on Fidelity.com: Understanding the SIMPLE IRA
Fidelity Advantage 401(k)SM
This 401(k) is Fidelity’s pooled employer plan (PEP). It can help maximize retirement savings for growing small businesses while offering a simple plan design and fewer administrative responsibilities.
Who can open one? Anyone who owns a growing small business and wants to start a 401(k) for the first time.
How it works As the plan sponsor and fiduciary of Fidelity Advantage 401(k), Fidelity handles many of the day-to-day operational responsibilities and investment management duties.
Fidelity has designed this to be a Safe Harbor 401(k) plan, which means:
- As the employer, you will agree to match dollar for dollar up to the first 3% of an employee’s annual compensation contributed to the plan, and 50 cents per dollar for the next 2%, which will be paid every pay period. These contributions are generally tax-deductible
- Employees may contribute up to $22,500 for 2023 ($30,000 if 50 or older)
- The total employer and employee contributions cannot exceed $66,000 ($73,500 with catch-up) in 2023
- Employers can automatically bypass some of the year-end testing that is required with a traditional 401(k) plan
Fidelity Advantage 401(k) also features a streamlined plan design with a simplified investment lineup and pre-determined employee eligibility.
Who it may help Due to higher contribution limits, Fidelity Advantage 401(k) is ideal for small business owners who want to start a 401(k) to maximize their retirement savings. While a self-employed 401(k) is only available to a business owner and spouse, this plan is ideal for business owners who currently employ or plan to grow up to 100-150 employees.
Things to keep in mind October 1 is the last available start date for the plan each year.
- For more information, explore Fidelity Advantage 401(k)
Consider a health savings account
Another option to consider is a health savings account (HSA). If you have an HSA-eligible health plan, these accounts offer a number of benefits, including a tax deduction, tax-free growth potential, and tax-free withdrawals to pay for qualified medical expenses—either now or in retirement.*
After age 65, if you don’t need the money for health care costs, you can take withdrawals from the account penalty-free. But, similar to a traditional IRA, taxes on contributions and earnings will be due.
- For more information, read on Fidelity.com: How can an HSA benefit you?
Time is one of the most important factors when it comes to building up your retirement fund. While you're young, time is on your side. Don't let the absence of a workplace retirement plan like a 401(k) stand in your way. There are plenty of other retirement savings options—pick a plan and start saving and investing.