Can a Self-Employed Person Invest in a Roth IRA?

by Maggie McCormick

Saving for retirement is essential, but self-employed people don't have the option of an employer-sponsored 401k plan. Along with several other types of savings plans, the Roth individual retirement account is an option for many self-employed people. The Internal Revenue Service only requires that you or a spouse have earned income to contribute.

Benefits of Roth

The major benefit of a Roth IRA is that your money grows tax-free and you can withdraw it during retirement without paying taxes. When combined with other retirement savings plans, it allows you to have more money with a smaller tax bite.

Income Limits

You must meet certain income limits to qualify for Roth IRA contributions. As of 2011, you can make contributions if your modified adjusted gross income (MAGI) is less than $122,000 as a single person or $179,000 as a married individual filing jointly with your spouse. Single individuals earning less than $107,000 and married couples earning less than $169,000 are eligible to make the maximum contribution. As a self-employed person, you would calculate your MAGI by taking your gross earned income and subtracting all major expenses, such as health insurance, half of the self-employment tax, office costs and contributions to tax-deferred retirement savings plans.

Deposit Limits

As of 2011, the Roth IRA deposit limits are $5,000 for those under 50 and $6,000 for those 50 and older, or your earned income, whichever is less. The limit phases out for single individuals earning between $107,000 and $122,000 and married couples earning between $169,000 and $179,000. This income must be from work that you do, not income like investment or rental property income. However, if you have a spouse who earns more than $10,000, you can make the full contribution to a Roth IRA account for each of you.

Alternative Retirement Investments

Though you cannot contribute to an employer-sponsored 401k plan, you can also save more money in tax-deferred retirement accounts for self-employed people, such as a SEP or SIMPLE IRA. Note, though, that these are tax-deferred accounts, so you'll be paying taxes when you withdraw in retirement. It's smart to create a blend of both tax-deferred and tax-free investments like a Roth.

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