Anyone who earns income can open an IRA, self-employed or not. Individual retirement accounts come in two flavors: the Traditional IRA, which offers an up-front tax break; and the Roth IRA, which provides tax-free income in retirement. IRA contributions are not considered a business expense, although they may help reduce your individual tax liability.
- IRA contribution limits: In 2022, individuals may contribute up to $6,000 to an IRA, with an additional $1,000 in catch-up contributions for savers who are 50 or older.
- IRA pros: IRAs are relatively easy to set up, and they offer a very wide range of flexible investment options. Everyone who earns income may contribute to an IRA in addition to the other plans outlined below.
- IRA cons: Compared to other self-employed retirement options, IRAs offer lower contribution limits. Available tax deductions may also be limited if you and your spouse file jointly and are covered by another retirement plan. Roth IRA eligibility is also limited by income. With certain exceptions, withdrawing funds from a traditional IRA prior to reaching age 59 ½ incur a 10% penalty.