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These are the top 5 self-employed retirement plans to consider when choosing the best retirement option for your goals.
In today's world, many are finding ways to ditch the corporate life and become self-employed.
If you are running a business, you may be wondering what your retirement plan options are. Today's article will explain the best retirement options available for the self-employed and the details of each plan.
Today's post is a guest post from Rick Pendykoski of Self Directed Retirement Plans, LLC.
Rick Pendykoski is the owner of Self Directed Retirement Plans LLC, a retirement planning firm based in Goodyear, AZ. He has over three decades of experience working with investments and retirement planning. Over the last 10 years, he has turned his focus to self-directed accounts and alternative investments.
Being your own boss is a different kind of freedom. But freedom is also accompanied by responsibility.
As soon as you become self-employed, you must plan to save for your retirement and prepare funds to fall back on in old age.
Moreover, if you have employees, you may also need to contribute to their retirement savings.
But the great thing about being self-employed is that you have a lot of amazing retirement plan options.
In this article, we talk about the top self-employed retirement plans that you can choose from. Let’s get started.
1. Solo 401(k)
A Solo 401(k) is one of the top self-employed retirement plans for small business owners who have no full-time employees other than themselves and/or their spouses.
It is an ideal plan for those who wish to have saved a lot by the time of retirement. Since contributions can be made both as an employer and an employee, the overall contribution limit can potentially increase.
A special rule for single-member LLCs is that they can contribute 25% of their net income, which is half of the self-employment tax and plan contributions amount subtracted from the total profit.
Moreover, you can hire your spouse, so they can contribute as an employee, which may even double your retirement savings as a couple.
It is the flexibility of investment options that makes it the best retirement plan for self-employed professionals.
Contribution Limit – As of 2023, the employee contribution limit for a Solo 401(k) plan is $22,500. You can also be eligible for a catch-up contribution of $7,500 or 100% of your earned income, whichever is less. The overall limit on total employee and employer contributions is $66,000.
If you are over 50 years old, you can make an additional $6,500 catch-up contribution.
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2. SEP IRA
SEP IRA (Simplified Employee Pension Individual Retirement Account) is another one of the top self-employed retirement options, ideal for business owners who have no or just a few employees.
Employees do not make contributions to a SEP IRA, so no salary deferral contributions are allowed for the employees. There is also no catch-up contribution.
But there is certainly a tax advantage. You can deduct your contributions or 25% of self-employment earnings, whichever is less, on your tax returns. Moreover, you can now make Roth contributions.
SEP IRA requires employers to contribute a fixed percentage of salary for each employee who may be eligible. And since the employer is also an employee, whatever salary you contribute for yourself, you will have to contribute the same percentage for your employees.
Contribution Limit – As of 2023, the contribution limit for SEP IRA is $66,000 or 25% of the owner’s net earnings or compensation, whichever is less. Additionally, no catch-up contributions can be made.
3. SIMPLE IRAs
A SIMPLE IRA (Savings Incentive Match Plan for Employees Individual Retirement Account) is a self-employed retirement plan for businesses with up to 100 employees.
It is similar to a traditional IRA but has higher contribution limits and a simpler administrative process. In this retirement plan, employees can contribute through salary deferrals. T
he employers can match the contributions of up to 3% of the compensation or make fixed contributions of 2%. But if you choose to contribute the fixed 2%, the employees need not contribute.
Talking about the tax benefits, contributions to a SIMPLE IRA are deductible, but retirement distributions are taxed. ROTH contributions are also allowed now.
Contribution Limit – As of 2023, you can contribute up to $15,500 and a catch-up contribution of $3,500. The total of all contributions can’t exceed $22,500.
4. Roth IRA
A Roth IRA (Individual Retirement Account) is a type of retirement savings plan that allows individuals to have a post-tax retirement account.
This means that you can contribute to Roth IRA with your income after tax, where the retirement contributions are not tax-deductible.
The investment earnings grow tax-free and qualified withdrawals are also tax-free, even if you are in your 70s. You can also continue contributing to Roth IRA as long as you earn.
The biggest advantage is that high-income earners who exceed the income limitations can also contribute to this self-employed retirement plan.
Contribution Limit – The contribution limit for a Roth IRA is $6,500 for individuals under age 50. For those 50 and older, there is an additional catch-up contribution of $1,000, bringing the total contribution limit to $7,500.
5. Defined Benefit Plan
Defined Benefit Plan is ideal for self-employed people with a high income and no employees.
It allows saving a lot and ensures a guaranteed stream of income in retirement. However, the plan is quite expensive and if you have to contribute to employees’ retirements as well, the administrative costs are driven up further.
Defined Benefit Plan contributions are generally tax-deductible and distributions during retirement are taxed.
Contribution Limit – In 2023, the contribution limit is calculated based on the benefit to be received at the time of retirement, your age, and expected returns on investment.
Self-Employed Retirement Plans
Now that you know the top retirement plan options for self-employed people, you can explore your options and see what works best for you based on factors like your saving plans, income, number of employees, budget, etc.
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