Self-Employed Retirement Plans: Know Your Options

Being self-employed gives you some freedom, but it's no excuse for not saving for retirement.

In fact, storing your money becomes very important. Unlike employees who have access to a 401(k), you're on your own.

And you may eventually want to sell your business and use the money to fund your retirement, but what if you don't? Retirement accounts are not just a cushion. , also consider it as a tax-advantaged way to reduce your income during periods of high income.

First, you need to figure out how much you need to save for retirement with NerdWallet. retirement allowance calculator. The amount you plan to save each year will help you decide which account is best for you.

Then decide where to put that money. The good news is that there are many options for flying solo. Here are five self-employed retirement plans that might be right for you.

Tax benefits: Tax deduction for contributions to a traditional IRA. There is no immediate deduction for Roth IRAs, but withdrawals at retirement are tax-free.

Employee element: none. These are individual plans. If you have employees, they can set up and contribute to their own IRA.

» In just a few minutes, You can open an IRA with an online brokerage. Check out NerdWallet's recommendations best IRA provider To get started.

An IRA is probably the easiest way for self-employed people to start saving for retirement. There is no special declaration obligation, and you can use it regardless of whether you have employees or not.

The most difficult part may be deciding which type of IRA to open. Differences between traditional IRA and Roth IRA, But if your business is in the early stages (read: not making much money), the tax treatment of a Roth IRA may be ideal. In that case, your tax rate may be higher in retirement, when you can withdraw that money tax-free. Roth IRAs also have no required minimum distributions. Roth IRAs are transferable to heirstax free.

Note: Roth IRAs have income limits for eligibility. People who earn too much cannot contribute.

Perfect for: A business owner or self-employed person with no employees (excluding spouse, if applicable).

Donation limits: For 2024, it's $69,000 plus an additional contribution of $7,500 or 100% of earned income, whichever is lower.^[0]

• In your capacity as an employee, you can make contributions just like a standard 401(k) offered by your employer. In 2024 her 100% of compensation or salary up to $23,000 will be deferred and if eligible he will apply an additional contribution of $7,500. Whichever is smaller.

• In your capacity as an employer, you can contribute up to an additional 25% of your remuneration. Employer contributions must be made by: Tax return deadlineor an extension date if applicable.

• There are special rules for sole proprietorships and sole member LLCs. You can contribute 25% of your net self-employment income. This is your net profit less self-employment tax and half of the plan contributions you paid on your own behalf.

• The maximum amount of compensation that can be used to consider your contribution is $345,000 in 2024.

Tax benefits: This plan works similarly to a standard 401(k) offered by your employer. This means you make pre-tax contributions and any distributions after age 59 1/2 are taxed.

Employee element: If you have employees, you can't contribute to a solo 401(k). However, you can hire your spouse so that they can also contribute to the plan.Your spouse can contribute up to a standard employee 401(k) contribution limits, You can also add employer contributions up to a total of $69,000 in 2024 and catch-up contributions if eligible. This could potentially double the amount he could save as a couple.

How to get started: You can open a solo 401(k) with many online brokers. If you have more than $250,000 in your account, you'll need to file documentation with the IRS each year.

This plan, which the IRS calls a “single-participant 401(k),” is especially useful for people who can or want to save a lot of money for retirement, or who want to save a lot of money in the next few years. attractive. When business is good, it's not when it's not.

Note that contribution limits apply on an individual basis, not on a plan-by-plan basis. So if you have outside employment that offers her 401(k), or your spouse does too, the contribution limits apply to both plans.

One more thing to know: You can also choose to go solo Roth 401(k), mimics the tax treatment of a Roth IRA. Again, you may want to choose this option if your current income and tax rate are lower than you expect in retirement.

Perfect for: Self-employed or small business owners with no or few employees.

Donation limits: The lesser of $66,000 in 2023, $69,000 in 2024, or up to 25% of compensation or self-employment net income. However, the maximum amount of compensation that can be used to account for contributions is $330,000 ($345,000 in 2024). Again, your net self-employment income is your net income minus the self-employment taxes you paid and half of your SEP contributions. No catch-up contribution. Be sure to make your contributions by the federal income tax filing deadline (usually he mid-April) or by the extension deadline if you apply for an extension.

Tax benefits: You can deduct the lesser of your contributions or 25% of your self-employed net income or compensation on your tax return, capped at $330,000 per employee in 2023 ($345,000 in 2024) ). Distributions of retirement benefits are taxed as income. Previously, there was no Roth version of the SEP IRA. Roth donations are now allowed under a bill signed by President Biden in December 2022.^[0]

Employee element: Employers must contribute the same percentage of each eligible employee's salary, and you count as an employee as well. That is, if you contribute his 10% of your own compensation, you must contribute his 10% of each covered employee's compensation.

let's start: Just like traditional and Roth IRAs, you can open a SEP IRA with many online brokers with some additional documentation.

A SEP IRA is easier to maintain than a standalone 401(k). They have a lower administrative burden because they have limited paperwork and no annual reporting to the IRS, and they have similarly high contribution limits. Like a Solo 401(k), a SEP IRA is flexible in that you don't have to make annual contributions.

The downside to being a business owner is having to make contributions for your employees. That contribution should be the same as what you pay for yourself, as a percentage of your salary, not a dollar amount. This can be expensive if you have more than a few employees or if you want to put away a large sum of money for your own retirement. SEPs cannot be used solely for personal storage. If you make contributions during the year, you must make contributions for all eligible employees.

Perfect for: Large companies with 100 or fewer employees.

Donation limits: Up to $15,500 in 2023, plus $3,500 in additional contributions in 2023 if you're 50 or older (up to $16,000 plus $3,500 in 2024). If you also contribute to your employer plan, your total contributions cannot exceed $22,500 in 2023 and $23,000 in 2024. Contributions must also be made by: tax day or extension deadline, if applicable.

Tax benefits: Contributions to a traditional SIMPLE IRA are deductible, but distributions in retirement are taxable. Contributions to employee accounts are deductible as business expenses. The bill, signed in December 2022, allows for Roth contributions and goes into effect in 2023.

Employee element: Unlike a SEP IRA, the burden of contributions is not solely on you. Employees can contribute through salary deferral. However, employers are typically required to make a matching contribution of up to 3% of the employee's compensation to the employee's account, or a fixed contribution of 2% of her for every eligible employee. Choosing the latter means your employees don't have to contribute in order to earn your contribution. The coverage limit for factoring contributions is $330,000 in 2023 and $345,000 in 2024.

let's start: This process is similar to a SEP IRA. You can open a SIMPLE with an online broker, but it involves more paperwork than a standard IRA.

If you're a medium-sized business owner with less than 100 employees, SIMPLE is a pretty good option because it's easy to set up and accounts are owned by your employees.

However, SIMPLE IRA contribution limits are significantly lower than SEP IRAs or Solo 401(k)s, so you may end up requiring contributions to employee accounts, and the number of participating employees If there are many, it can be expensive.Click here for details SIMPLE IRA vs. 401(k).

Traditional SIMPLE IRAs are also not flexible, especially in the early stages. Early withdrawals before age 59 1/2 are treated like early 401(k) or IRA distributions in that they are taxed as income and subject to a 10% penalty. However, if you withdraw within the first two years of joining a SIMPLE IRA, the 10% penalty increases to 25%. That means she also cannot roll over her SIMPLE to another retirement account within two years. gin.

One more thing to know: SIMPLE has a 401(k) version. This works in much the same way, but allows participants to receive loans from their own accounts. This version requires more administrative oversight and can be more expensive to set up.

Perfect for: People who are self-employed without employees, have a high income, and want to continue saving a large amount for their retirement.

Donation limits: It is calculated based on the benefits you receive at retirement, your age, and expected investment returns.

Tax benefits: Contributions are generally tax deductible, and retirement distributions are taxed as income. An actuary is required to calculate deductible limits, which adds an additional layer of control.

Employee benefits: If you have employees, you will typically offer this plan to them and make contributions on their behalf.

let's start: Securities trading options are more limited than the above accounts, but charles schwab We offer defined benefit plans.

People often lament the decline of pension systems, and this is exactly the case. If you are self-employed, you can use a defined benefit plan to provide your own pension, which is your source of income after retirement.

So why doesn't everyone do it? It's expensive, with high setup fees and annual fees. If you have employees, your fees will likely be higher and you will need to contribute on their behalf. Each year requires a significant administrative burden and a commitment to fund the plan by a certain amount each year. If the amount needs to be changed, additional charges will apply. He needs to stick with the plan for at least three years for it to be worth it, financial advisers say.

The advantage is that you can stash away a large amount of cash in these and defer taxes until retirement. If you are fairly close to retirement, have a high income that you know you can maintain, and can save a significant amount per year (i.e., $50,000 to $80,000 or more), this plan is for you. You may also consider supercharging your account. your savings efforts.

Once you decide to open one of these accounts, you'll need to decide where to open it.

Most online brokers allow you to open the four most common account types: IRA, solo 401(k), SEP IRA, and SIMPLE IRA.

» Ready to get started? Find our picks best IRA provider

Each broker will guide you through the process of opening one of these accounts and explain the documents you need to submit to the IRS. However, to be on the safe side, you may want to work with an accountant.