How the Self-Employed Can Save for Retirement

When we talk about saving for retirement, we often talk about the importance of employer matching dollars. No good financial advisor would allow you to skip out on grabbing what is essentially free money, so the hard and fast rule is to contribute at least enough to your employer-sponsored plan to get that cash -- then, you can look into other options, like an IRA.

But what if you are your own employer? Are you behind from the get-go, a lost cause when it comes to retirement? Well, you will have to make up some slack without those company dollars, says Jean Keener, a fee-only financial planner and principal of Keener Financial in Texas. "You have to save more. Essentially, someone who is self-employed has to save for not only their own contributions, but the employer contributions they're missing out on."

Still, the answer to the question "Are you a lost cause?" is "Not at all." In fact, there are some quite attractive retirement plans available for people who've chosen to be their own bosses. We'll go through the pros and cons of each below, so you can choose one to fit your needs.

• Roth or Traditional IRA: You have this choice just like everyone else, and if you're eligible for a Roth (you can make the full contribution if your adjusted gross income is less than $105,000 for a single filer or $166,000 for married filing jointly) I suggest you make use of it. Contributions to a Roth IRA are made with after-tax dollars, which means your withdrawals are tax-free. But these accounts come with an annual contribution limit of $5,000 ($6,000 if you're 50 or older) -- not enough to float you in your retirement years, no matter how you run the numbers. So you'll need to be saving elsewhere as well.

• Solo 401(k): This account tends to be your best bet if you don't have any employees. With a solo 401(k), you can contribute $16,500 annually, and your contributions are tax deferred. On top of that, as the business owner, you can also contribute up to 20% of your self-employment income, up to a combined maximum of $49,000. If you're 50 or older, you can also add in a catch-up contribution of $5,500. And if your spouse works for your company, he or she can also contribute up to $49,000.

• SEP IRA. "The beauty of a SEP IRA is that contributions aren't required every year, so if your cash flows fluctuate and you want to contribute some years and not others, you can do that," says Keener. The maximum annual contribution to a SEP IRA is $49,000 or 20% of your compensation. You can have this account whether you have employees or not, but if you're contributing a percentage of your income for yourself, you have to contribute that same percentage for your employees. SEP IRAs tend to be used by people who are earning a great deal of money, and who have the ability to max them out and save a lot toward retirement -- and toward the retirement of their employees. They are generally easy to open and have low fees.

• SIMPLE IRA. With this account, you can contribute up to $11,500 per year. If you're 50 or older, you can make a catch-up contribution of $2,500. If you have employees, you must also contribute to accounts for them, either by matching their contributions dollar for dollar up to 3%, or as a 2% fixed contribution, regardless of what the employees earn. If you don't want -- or can't afford -- to contribute to your employees' retirement, you shouldn't open a SIMPLE IRA.