Self-Employed Retirement Plan Options
Are you a freelancer or an entrepreneur? Being your own boss has many perks. You can set your own schedule, prioritize the projects that mean the most to you, and have the leverage to make key decisions that can alter the course of your career (maybe hit the slopes of Mount Bachelor on a Tuesday). But you do not have the built-in HR benefits that come with being an employee of a company — instead, you need to manage things like retirement savings for yourself.
Thankfully, there are several solutions for self-employed individuals when planning for retirement. Below we will highlight six options that are commonly used by our self-employed clients in Central Oregon.
1. Traditional and Roth IRAs
A traditional or Roth IRA is a common choice and is suitable for individuals who are saving less than or up to $6,000 a year, or $7,000 if you are over age 50.1 There are tax advantages to both – you get a tax deduction in the year you contribute to a Traditional IRA and tax-deferred growth. With a Roth, there is no immediate tax deduction, but the withdrawals in retirement are tax-free (including the growth!).
2. SEP IRA
A Simplified Employee Pension (SEP) IRA works for those who are self-employed with few or no employees. SEP IRA contributions for a sole proprietor or a single-member LLC in 2021 are up to 20 percent of net self-employment income after the self-employment tax deduction, or $58,000. There is a $290,000 limit on compensation considered for 2021 ($285,000 for 2020). Self-employed business owners taxed as an S Corp are limited to 25% of W2 wages up to the maximum contribution of $58,000. Employers must contribute an equal percentage of salary for each employee, and you will also be counted as an employee.2
3. Solo 401(k) (AKA: Individual 401(k), Self-Employed 401(k), One-Participant 401(k), or Keogh)
The solo 401(k) plan can be a Traditional 401(k) or a Roth 401(k) that is for self-employed individuals who do not have employees, other than their spouse. You can contribute up to $58,000 for 2021, and if you are over 50, you have an additional $6,500 you can add as a “catch-up” contribution.3 There are several variables that can assist with your contributions, including the special rule for single-member LLCs and sole proprietors: you can contribute 25 percent of net self-employment income up to the maximum of $58,000. Contributions can be made pre-tax (Traditional) or post-tax (Roth).
4. Defined Benefit Plan
This plan is a fitting choice for self-employed individuals who are looking to put away more each year than your typical allowed contributions. For 2021, the maximum contribution is $235,000.4 The contribution will be based on how much you will be receiving once you retire, your age, and the expected return on your investments. Contributions are tax-deductible in most cases, and the distributions during retirement will be taxed as income. Defined benefit plans require special record-keeping and the use of an actuary. They also typically have a multi-year commitment.
5. Simple IRA
The Simple IRA (Savings Incentive Match Plan for Employees) is ideal for business owners who have 100 or fewer employees. For 2021, you can contribute up to $13,500, with a catch-up contribution of $3,000 if you are over the age of 50. If contributing to another plan, your contributions cannot exceed $19,500 across all plans. The contributions are tax-deductible, but any distributions during retirement are taxed. Any contributions you make to an employee account are also deductible as a business expense.5
6. Self-Directed IRA
A self-directed IRA (SDIRA) maintains the same eligibility and contribution limits as a traditional IRA. However, an SDIRA enables account holders to invest in alternative assets, such as precious metals, cryptocurrency, and real estate. With a self-directed IRA, you are the primary manager of your account, so you choose exactly where to allocate funds. But with many unique investments available it’s essential that holders understand the regulations, knowledge, and time commitment involved in their investments.
Being self-employed certainly has its advantages, but it often means making big decisions for your future on your own. At Ascent, we take the guesswork out of retirement planning to develop a path for your unique retirement needs. Who is guiding your retirement plan?
1 https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-ira-contribution-limits
2 https://www.irs.gov/retirement-plans/operating-a-sep
3 https://www.irs.gov/retirement-plans/one-participant-401k-plans
4 https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-defined-benefit-plan-benefit-limits
5 https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-simple-ira-contribution-limits
