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  • Writer's pictureSamantha Diggs

5 Types of Retirement Plans for Self-Employed Individuals

As exciting a venture as owning your own business can be, it can also be frightening, especially when you're not sure what kind of retirement plans are available for the self-employed. Choosing the right retirement plan can increase your retirement savings and open a variety of potential benefits for you and your employees. Not sure where to start? It’s all a matter of finding which of the many options will best help you build your future income. Discover which plan is right for your business with these five types of retirement plans for self-employed individuals.


Retirement Plans for Self-Employed Workers

Solo 401(k)

A Solo 401(k) works best for self-employed individuals who have no employees aside from, potentially, a spouse. If an employer chooses to “hire” their spouse, they can, in turn, contribute to the Solo 401(k). Working as a team helps build retirement savings faster: a popular draw for those wanting to save more in less time. Basic requirements for a Solo 401(k) include:

  • Business owner must be the sole employee (or only other employee is a spouse)

  • Contribution limit of $22,500 or 100% of earned income—whichever is lower. Those aged 50 or older may participate in catch-up contributions of $7,500 for a total maximum up to $30,000.

  • 25% of income can be contributed by self-employed proprietors and single member LLCs.



Simplified Employee Pension IRA

Simplified Employee Pension (SEP) IRAs are designed for self-employed business owners with few or no employees. While they may seem similar, there are differences between a SEP IRA and a Solo 401(k). Many find SEP IRAs to be easier to maintain than Solo 401(k)s due to the decreased amount of paperwork and lack of annual IRS reporting. Because SEP IRAs are equal-contribution plans, owners must apply the same percentage of contributions to all employees as they do themselves. However, these plans allow owners to choose when to contribute, allowing for flexibility. Requirements for a SEP IRA can be broken down into a few points:

  • Allowed contributions are 25% of earnings or up to $66,000 in 2023. As catch-up contributions are not included in this plan, a limit of $330,000 of adjusted annual compensation can be factored into calculating the contribution amount on an individual basis.

  • 25% of either contributions or income (whichever is lower) can be deducted from business tax returns.

  • Must be 21 years or older and employed by business for at least 3 years.

  • Retirement distributions are taxed.



Traditional or Roth IRA

If you’re a business owner just starting out, a traditional or Roth IRA may be the right choice for you. Newly self-employed individuals can roll their previous 401(k) into the current IRA and contribute up to $6,500 in 2023. A Roth IRA can be a great asset to new business owners needing to boost funds against potential risks. Likewise, businesses with more infrastructure can utilize traditional IRA plans during periods of high inflation to reduce contribution deductions. Whichever plan you may choose, there are certain distinctions between the two to consider:

  • Traditional IRA

    • Contributions are tax-deductible and withdrawals are taxed like income.

    • Self-employed spouses with one or more retirement plans have tax deductions reduced or eliminated upon reaching a the IRS established income limit.

    • Distributions may be taken out once the member is 59.5 years old. The member must begin withdrawals at 72 years old.

  • Roth IRA

    • Contributions are not tax deductible.

    • Withdrawals and investments are tax-free.

    • Contribution limits are highly varied depending on filing status and income levels.


SIMPLE IRA

Savings Incentive Match Plan for Employers—or SIMPLE—IRAs are made to service self-employed business owners with less than 100 employees. SIMPLE IRAs can be attractive due to their lower contribution requirements and their ability to contribute tax deductible contributions into employee accounts. Key points of a SIMPLE IRA retirement plan include:

  • Employee contribution limits are $15,500 in 2023 with a catch-up limit of $3,500.

  • As a match-contribution plan, 3% of employee income is required to be matched by employers.

  • Contributions are tax-deductible and can be deducted as a business expense. Retirement distributions are taxed.



Defined Benefit

A defined benefit plan is a good choice for someone who’s not afraid of higher risk to receive high rewards. These plans are employer-sponsored, meaning the business owner is responsible for all planning and investment risks; however, it also allows self-employed workers to deposit larger contributions annually if the owner close to retirement. Benefits within these retirement plans are often computed based on age, income history, and expected investment earnings. Consider these factors for your potential defined benefit retirement plan:

  • Contributions are tax-deductible with distributions being taxed like income.

  • Retirement benefits to employees can be distributed via annuity monthly payments or a single lump-sum.

  • All contributions are made on employees’ behalf. Self-employed owners have a guaranteed retirement pension income that they have contributed for themselves.

  • Any changes determined for payment or annual contributions require additional fees.



A Plan for Every Self-Employed Business Owner


Self-employed business owners—big or small—can build up retirement savings smartly and productively for future income through various retirement plan solutions. From IRAs to self-sponsored plans, retirement plans for self-employed owners may seem daunting, but can help provide great benefits to both your retirement lifestyle and current day development. To learn more about different retirement plans or how to build your finances as a business owner, contact RPCSI today





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