Retirement Plans Available to Self-Employed Individuals

Self-employed individuals have several retirement plans available to them; the one that works best for you depends on your individual situation. It is wise to do some research and consult a financial expert for help selecting the appropriate option.

Your best strategy will depend on your tax situation, income and objectives. We suggest consulting with an accountant or financial advisor experienced in retirement planning for self-employed people before taking any action.

SEP IRA

Self-employed individuals who want to save for retirement but don’t have employees can take advantage of a SEP IRA. These plans are tax-deferred and offer higher contribution limits than a traditional IRA.

The SEP IRA is a popular retirement plan for self-employed individuals, offering them the ability to contribute a substantial amount each year, tax-deferred or completely tax-free, depending on your plan type.

You may make annual contributions to your SEP account up until the due date of your business’s income tax return, including extensions.

Your SEP IRA can be established at any time and the percentage of contributions made. This could be beneficial if your business experiences a downturn; you could elect to skip or reduce contributions accordingly. Furthermore, these amounts can adjust according to changes in business profits. For 2022 and 2023 respectively, the maximum amount that can be contributed into a SEP IRA is 25% of adjusted net earnings – up to $61,000 and $66,000, respectively.

SIMPLE IRA

SIMPLE IRAs are retirement plans available to self-employed individuals who do not have a qualified workplace plan. These arrangements offer great savings opportunities while aiding with tax and retirement planning objectives.

A Roth IRA plan is a tax-deferred savings account that allows you to contribute money in your name and deduct it on your taxes. Furthermore, the IRS requires employers to match employees’ contributions up to a certain percentage.

Employee contribution limits are $14,000 for those under 50, and $15,500 for those over 50. Employer matching contributions can amount to up to 3% of the total amount an employee contributes.

In addition to the employer match, you may make non-elective contributions up to 2% of your earnings. Furthermore, an additional $3,000 catch-up contribution can be made in 2022 and $3,500 in 2023.

Solo 401(k)

A solo 401(k) is a retirement plan tailored specifically for self-employed individuals. As the business owner, you are both employer and employee in this type of plan, enabling you to make significantly higher contributions than an employee would in an employee 401(k).

Another benefit of a 401(k) retirement plan is that it gives you control over which investments to invest in. As an employer, you have the option to use funds in your 401(k) plan for tax-deferred accounts or Roth accounts.

You may be able to borrow against your 401(k) account, which can be beneficial when paying for college, personal expenses or a home purchase. These loans have low interest and are pegged to the prime rate, making them more advantageous than taking out a loan from a bank; however, you may need to pay an administrative fee for this option. Therefore, it’s essential that you consider all of your needs before determining if a solo 401(k) is right for you.

Keogh Plan

The Keogh Plan is a retirement plan that allows self-employed individuals to contribute up to 100% of their earnings towards retirement savings. This makes it an attractive option for high earners in the self-employment sector.

However, the IRS has altered the rules for these plans and they are no longer as popular with high-earning self-employed individuals. Nowadays, most of these individuals would benefit more from traditional IRAs and individual or solo 401(k) plans instead.

The Keogh Plan has more red tape and administration requirements than other retirement savings options, making it costly to operate. Furthermore, the IRS audits these plans regularly; thus, having a professional administrator manage them for you is recommended.