Annuity Lesson #37
The Freelancer’s Guide to Building a "Private Pension" with Annuities
Jeremiah Konger
CEO
"An annuity may be particularly valuable for women who are concerned about outliving their money."
If you run your own business or freelance, you are effectively the CEO and HR department of your retirement plan. Many self-employed people rely heavily on investment accounts tied to the market, and that exposure can leave your retirement vulnerable if markets drop near the time you need income.
This guide explains how a self-employed annuity can help create a private, predictable paycheck and how to combine annuities with traditional plans like a Solo 401(k) or SEP IRA.
You’ve worked hard to build your business. Don't let a market crash take it away.
Key Takeaways
- Annuities are insurance products, not bank deposits, and are not FDIC insured.
- Qualified annuities inside Solo 401(k) or SEP IRAs retain tax-deferred status; non-qualified annuities grow tax-deferred but are purchased with after-tax dollars.
- Common annuity choices for the self-employed include fixed index annuities, multi-year guaranteed annuities, and immediate income annuities.
Can Self-Employed Individuals Use Annuities for Retirement?
Yes, self-employed individuals can use annuities to build a guaranteed income that functions like a personal pension. You can purchase annuities inside qualified plans, such as a Solo 401(k) or SEP IRA, to preserve tax-advantaged status, or buy non-qualified annuities with after-tax dollars for additional tax-deferred growth beyond retirement plan contribution limits.
Using an annuity in your retirement toolkit is primarily about shifting some of your retirement risk from the open market to an insurance contract. For a business owner concerned about protecting principal and ensuring steady cash flow in retirement, annuities can act as a hedge against sequence of returns risk and an income floor for essential expenses.
Solo 401(k) vs. SEP IRA vs. Annuity
| Feature | Solo 401(k) (2026) | SEP IRA (2026) | Annuity |
|---|---|---|---|
| Contribution Type | Employee + Employer | Employer only | Flexible (no formal “contribution” structure) |
| Employee Contribution | Up to $24,500 | Not allowed | Not applicable |
| Catch-Up Contributions | $32,500 (50+), up to $35,750 (ages 60–63) | None | Not applicable |
| Employer Contribution | Up to 25% of compensation | Up to 25% of compensation (≈20% if self-employed) | Not applicable |
| Total Contribution Limit | Up to $72,000 (up to ~$80,000–$83,250 with catch-ups) | Up to $72,000 | Insurers set internal limits |
| Tax Treatment | Tax-deferred (traditional) or Roth option available | Tax-deferred | Tax-deferred growth (non-qualified = after-tax contributions) |
| Contribution Deadline | Plan setup by Dec 31, 2026; contributions by tax filing deadline | Tax filing deadline (including extensions) | No strict IRS deadline |
| Flexibility | High (allows both employee deferrals and profit sharing) | Moderate (simpler but less flexible) | High contribution flexibility, lower liquidity |
| Compensation Limit (2026) | $360,000 max considered | $360,000 max considered | Not directly applicable |
Why Traditional Options (SEP IRA & Solo 401k) Might Not Be Enough
Solo 401(k)s and SEP IRAs offer high contribution limits and tax advantages, but they typically invest in market-linked assets. When you are heavily invested in equities or bonds within these accounts, a large market downturn near retirement can drastically reduce the amount available to convert into lifetime income. This scenario is known as sequence of returns risk, and it is particularly harmful to people who must start drawing substantial income shortly after a market decline.
Annuities add a different kind of risk management. Rather than relying solely on market performance, an annuity can convert a portion of your savings into guaranteed income. That guaranteed portion becomes a predictable stream you can use to pay essential expenses, freeing the rest of your portfolio to pursue growth with less pressure to avoid short-term losses.
3 Best Annuity Strategies for Business Owners
Choosing an annuity strategy depends on where you are in your retirement timeline, your cash flow needs, and how much flexibility you need to retain for business purposes.
Below are three practical strategies commonly used by freelancers and small-business owners to build a private pension while managing business risk.
The Max-Out Strategy (Non-Qualified)
The Max-Out Strategy is aimed at high-earning freelancers who have already maximized contributions to their Solo 401(k) or SEP IRA and still want additional tax-deferred savings.
A non-qualified annuity allows you to invest amounts beyond retirement plan limits and receive tax-deferred growth on gains until withdrawal. This strategy can be useful when you want to set aside extra profits without increasing plan administration.
Non-qualified annuities do not have IRS contribution caps, but they are funded with after-tax dollars. Withdrawals are taxed on the earnings portion as ordinary income. These contracts can be structured to provide deferred income or to begin payouts at a planned retirement date, providing a flexible way to create more lifetime income.
The Fixed Index Growth Strategy
Fixed index annuities, sometimes called index-linked annuities, are often used by business owners who are 5 to 10 years from retirement and want some participation in market upside without risking principal. These annuities credit interest based on the performance of a market index, subject to caps, spreads, or participation rates, while protecting the contract value from negative index returns.
This strategy works as a way to lock in gains and build a “floor” for your retirement assets. By allocating a portion of your retirement savings to an FIA, you reduce the risk that a late-cycle market downturn will erode the money you plan to convert into guaranteed income
The Immediate Income Bridge
Immediate income annuities provide near-instant guaranteed income in exchange for a lump sum. Business owners who retire early or anticipate a gap between leaving the business and when Social Security or other income sources begin can use an immediate annuity as a bridge. It is suitable for those who need a predictable cash flow to cover fixed costs like health insurance premiums or mortgage payments.
Because immediate annuities begin payments quickly, they are less flexible than deferred contracts and typically offer higher payout rates for the income they provide.
Comparing the "Big Three" Self-Employed Plans
Solo 401(k)s, SEP IRAs, and annuities each have strengths and trade-offs. Knowing each of them will help you understand which strategy suits your retirement goals better.
| Solo 401(k) | SEP IRA | Annuities |
|---|---|---|
| 🔹 High contribution limits, making it ideal for maximizing tax-deferred savings 🔹 May allow loans, offering more flexible access to funds 🔹 Suitable for self-employed individuals who want both growth and flexibility | 🔹 Simple to set up and administer, with minimal paperwork 🔹 Employer-only contributions, which limits flexibility 🔹 No Roth option for employee contributions 🔹 Can be less efficient for those with variable income | 🔹 Allow unlimited non-qualified contributions 🔹 Can provide guaranteed lifetime income 🔹 Useful for creating a stable income floor in retirement 🔹 Come with trade-offs like surrender periods and limited liquidity |
Many self-employed savers use a blend: contribute to a Solo 401(k) or SEP IRA to capture tax-favored savings and use annuities to create an income floor that protects essential expenses from market volatility.
Tax Advantages: Why the IRS "Likes" Your Annuity
Annuities offer tax-deferred growth on earnings. When used inside qualified plans like a Solo 401(k) or SEP, the annuity keeps the account’s tax-advantaged status.
With non-qualified annuities, contributions are made with after-tax dollars, but earnings grow tax-deferred until withdrawn. Withdrawals are taxed differently depending on whether the contract is qualified or non-qualified, so it is important to understand how distributions are taxed in your situation.
Non-qualified annuities use an exclusion ratio to determine the taxable portion of each distribution when the annuity is annuitized. Knowing it may help you understand how an annuity would affect your tax situation, including required minimum distributions if the contract is held inside a tax-qualified plan.
Pros and Cons for the Solo-Entrepreneur
Annuities can be the missing factor in your retirement strategy; however, they also come with certain trade-offs:
| Pros | Cons |
|---|---|
| ➕ Guaranteed income, which can create a stable financial baseline in retirement ➕ Principal protection in many fixed and fixed indexed annuities ➕ Tax-deferred growth, allowing earnings to compound without annual taxation ➕ Potential creditor protection in some states, adding a layer of risk management ➕ Useful for creating a predictable income that isn’t tied to market volatility | ➖ Limited liquidity due to surrender charges, especially in early contract years ➖ Can be complex, with different riders, fees, and crediting methods that are hard to compare ➖ Requires careful evaluation of insurer strength and contract terms |
Secure Your Retirement
Creating a private pension with annuities can reduce the pressure on your investment portfolio and help ensure that essential expenses are covered regardless of market conditions. For many self-employed people, the right mix of Solo 401(k) or SEP IRA contributions and carefully chosen annuity contracts creates a balanced plan that protects lifetime income while allowing for continued growth.
You’ve worked hard to build your business. If you want a second opinion on how an annuity could fit into your self-employed retirement planning, book a personalized consultation with an Annuity Association advisor.
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FREQUENTLY ASKED QUESTIONS
Is an annuity tax-deductible for the self-employed?
Annuity contributions themselves are not deductible unless the annuity is held inside a qualified retirement plan, such as a Solo 401(k) or SEP IRA. If you buy an annuity with after-tax dollars, the premium is not deductible, though earnings grow tax-deferred.
Can I buy an annuity through my LLC?
In many cases, yes. An LLC-owned retirement plan can purchase annuity contracts, and business owners often use entities to hold retirement assets; however, the structure and plan rules must follow IRS and insurer requirements. The rules may vary depending on how the plan is structured.
How do I move my old SEP IRA into an annuity?
You can typically perform a trustee-to-trustee transfer or a rollover from your SEP IRA into an annuity purchased inside a qualified account, preserving tax-deferred status.
What is the best annuity if I want liquidity?
If liquidity is a priority, consider shorter surrender period MYGAs (multi-year guaranteed annuities) or choose products with penalty-free withdrawal features. Keep in mind that greater liquidity often comes with lower guarantees or interest credits.
How do annuities help with sequence of returns risk?
Annuities convert a portion of your assets into guaranteed income, which reduces reliance on selling investments during market downturns. This guaranteed income acts as a floor for essential expenses and allows the remainder of your portfolio to remain invested for growth.
Annuity Expert
Jeremiah Konger
PS - Here's 3 ways we can help you learn more about annuities.
1. Watch Videos on How to Identify The Highest Paying Protected Income & Growth Annuities.
2. Watch Videos That Reveal What to Look For When Buying A Protected Growth Annuity.
3. Click Here To Access Our Annuity Review Vault To Compare The Pro's and Con's of Dozens of Annuities.
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