By: Amanda Phillips

For age and want, save while you may; no morning sun lasts a whole day.

— Benjamin Franklin

Pennsylvania’s own Ben Franklin would have loved what I’m about to share with you. You see, Franklin was ahead of his time when it came to saving and investing for the future. But in addition to knowing a thing or two about money, he typically earned his through all sorts of different gigs — printer, journalist, shopkeeper, accountant, inventor, diplomat, and many more. Sometimes he worked for others; more often, he worked for himself.

Why do I mention this? Because it’s the subject of this month’s blog post!

If you are an independent contractor, freelancer, gig worker, per diem employee, or small-business owner, you know very well what it means to hustle. To grind. To constantly be trying to get ahead…so tomorrow can be better than today, and next year even better still.

One thing you may not be very familiar with is saving for retirement.

Let’s face it: Most people in the U.S. save for retirement through an employer-sponsored account, like a 401(k). A portion of their paycheck is automatically contributed every month, and in some cases, the employer matches those contributions up to a certain point. You set it, you forget it, and as a result, you don’t really have to worry about it.

But if you’re self-employed, you don’t have that luxury. For many independent workers, it can be extremely difficult to set aside money for retirement at all, let alone consistently. Saving for the far future often gets mentally filed away under the heading, “Bridges to cross once I’ve come to it.” Others take the piggy bank approach and try to deposit money into a CD or savings account as best they can.

Neither of these options are ideal. Fortunately, there is an option specifically designed for small business owners and self-employed workers. An option that brings both tax benefits and the potential to grow your savings over time.

It’s called a SEP IRA.

A SEP IRA — the “SEP” stands for Simplified Employee Pension — is a type of retirement account specifically for small business owners and those who are self-employed or earn freelance income. With a SEP IRA, you can contribute up to 25% of your total income each year, up to a maximum of $70,000. The money can be invested however you please, meaning that if you contribute regularly, your savings can compound and grow as you get closer to retirement. (For more on the power of compounding, see this article by our president, Michael Hudock.)

As with a traditional IRA, contributions made to a SEP IRA are tax-deductible. That makes SEP IRAs a handy way to reduce your tax bill in a given year. (Keep in mind, however, that any distributions you take from your SEP IRA after retirement will be taxed as ordinary income. And while you can withdraw money from your SEP IRA at any time, doing so before the age of 59 ½ usually triggers a 10% penalty.)

These benefits typically make a SEP IRA a much better option than depositing money into a savings account or buying a CD or annuity. While those approaches have their place in a financial plan, they do not come with the same tax benefits as a SEP IRA. Furthermore, while you can earn interest with a savings account or CD, this pales in comparison to what you can achieve by investing the funds in the stock market through a SEP IRA.

SEP IRAs also work better for independent contractors than a traditional IRA. That’s because the annual contribution limits are much higher. With a traditional IRA, you can only contribute $7,000 per year, plus an additional $1,000 if you are age 50 or older. With a SEP IRA, you can contribute a maximum of $70,000 per year.

SEP IRAs are extremely easy to set up, and you can use them even if you have a 401(k) with an employer! That’s perfect for those who may work a regular day job but also have a “side hustle.” With this approach, you can max out contributions to your 401(k) while reserving your SEP IRA for whatever you earn through self-employment.

Here at Hudock Capital, we frequently work with contractors, creatives, and even medical professionals hired by a hospital or clinic on an “as-needed” basis. In our experience, establishing a SEP IRA is one of the simplest and most powerful ways to save for retirement. So, if you fit any of these categories, or if you’re a small business owner looking for ways to help both you and your employees save for retirement, please feel free to reach out. We’d be happy to answer your questions and discuss your options. Our mission is to find out what you need, and then discover how to make it happen. Please let us know if we can ever be of assistance!

— Amanda Phillips