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How to Determine Solid Self Employed Retirement Plans
January 26, 2020
How to Determine Solid Self Employed Retirement Plans

How to Determine Solid Self Employed Retirement Plans

Self-employment comes with significant freedom, but there’s also more responsibility required. If you’re a self-employed professional, one of the biggest factors you should consider is how you’ll save for retirement.

Employees often have access to an employer-sponsored 401(k), but self-employed individuals don’t have that luxury. Still, if you’re self-employed, there’s no reason to stress about retirement, as there are plenty of options available. 

This post will review the best retirement plans for self-employed individuals. That way, you can have the freedom you want, while taking steps to financially prepare for the future.  

The Big Five Retirement Options For Self-Employed Individuals

More than a third of small business owners aren’t preparing for retirement. There are a variety of reasons for this, but regardless, failing to plan for retirement is always a mistake. 

When you delay saving for retirement, you’re losing out on money that you’ll never get back. Not only is this financially unwise, but it’s also unnecessary. 

There are many excellent retirement options for self-employed people. Let’s look at the top five self-employed retirement plans you can consider. 

Roth Or Traditional IRAs

Individual retirement accounts (IRAs) are always a good retirement option. These plans do come with maximum contribution limits, but they also come with tax advantages. Best of all, you don’t need an employer to take over an IRA. Most brokerage firms and banks will offer Roth and traditional IRAs. 

Roth IRAs

First established in 1997, a Roth IRA is a retirement savings plan that allows you to withdraw your money tax-free. The plan is funded with after-tax money, so you don’t have to worry about paying taxes on your savings at retirement. 

However, there are limits to how much you can contribute per year. For 2019 and 2020, the yearly contribution limit is $6,000. If you’re over the age of 50, you can contribute $7,000 per year. 

There are also income limits on Roth IRAs. For individuals, you have to earn less than $137,000 per year to take out a Roth IRA. For married couples, the income limit is $206,000 per year. 

Traditional IRA

A traditional IRA is similar to a Roth IRA, but the biggest difference between the two is how taxes are handled. With a traditional IRA, you’ll contribute pre-tax money and won’t pay any taxes until you’re ready to withdraw your funds.

The contribution limits are the same for traditional IRAs and Roth IRAs. Plus, any contributions you make to your traditional IRA can be claimed on your taxes come tax season. 

Solo 401(K)s

A solo 401(K) is a great option for self-employed individuals with no employees, such as freelancers or independent contractors. However, if you’re married, the plan will cover you and your spouse. 

In addition, these plans come with much higher contribution limits than what other retirement plans offer. Employees can contribute up to $19,000 a year to their 401(k). But as a self-employed individual, you can contribute up to 25 percent of your income, with a maximum yearly contribution limit of $57,000. 

If you’re over the age of 50, you can make catch-up contributions of $7,000 per year. Solo 401(k)s are funded with pre-tax money, so you’ll pay taxes once you’re ready to withdraw the funds. 

Solo 401(K)s

SIMPLE IRA

A SIMPLE IRA is a retirement savings plan for business owners with fewer than 100 employees. This plan allows you to contribute to your employees’ retirement savings, and these plans are fairly easy to set up and manage.  

As an employer, you can contribute up to 2 percent to your employee’s retirement plans, or match contributions up to 3 percent of that individual’s salary. You’ll receive a tax deduction for any contributions you make. 

However, you’re not going to be able to save as much for retirement as you can with some of the other plans listed in this article. Also, there’s a two year waiting period before a SIMPLE IRA can be rolled over into a Roth IRA.

SEP IRA

A SEP IRA is a retirement savings plan for employers and self-employed individuals. The contribution limits are higher than what traditional IRAs allow, and employers can decide how much they want to contribute each year. For 2020, the maximum contribution to a SEP IRA is $57,000. 

These plans are fairly easy to maintain and require very little paperwork. In addition, the plans are flexible enough that you don’t have to contribute every year if you don’t want to. 

Defined Benefits Plans

A defined benefit plan is great for self-employed individuals that earn a high income. The contributions are tax-deductible, though you’ll need an actuary to determine your yearly deduction limit. 

If you have employees, you can offer this as a benefit and make contributions on their behalf. However, your options for setting up a defined benefits plan will be more limited. These plans often come with high setup fees, and not every brokerage firm will offer them. 

Which Self Employed Retirement Plans Are Right For You?

One of the challenges of self-employment is that no one is going to remind you to save for retirement. But fortunately, there are many retirement plans for self-employed individuals that you can pick from. 

The plan that’s best for you will depend on a variety of factors. First, you’ll need to consider how much you are looking to save toward retirement every year. 

If you’re wanting to start small and only make the minimum contribution, then a traditional or Roth IRA could be a good option. Many people like the Roth IRA because it uses after-tax money to fund your retirement savings. On the other hand, a solo 401(k) allows you to contribute up to $57,000 per year. 

If you have any employees, then the SIMPLE IRA, SEP IRA, or defined benefits plan may be a better option. These plans allow you to make higher contributions and contribute to your employees’ retirement savings. However, you’ll want to consider how much time you’re willing to spend on the required administrative tasks.   



Frequently Asked Questions

What retirement options are available for people who are self-employed?

If you’re self-employed, there are five main retirement plans you can choose from:

  • A traditional or Roth IRA: These plans come with $6,000 yearly contribution limits, though you can add catch-up contributions if you’re over the age of 50. Traditional IRAs are funded with pre-tax money, while Roth IRAs are funded with after-tax funds.
  • A solo 401(k): A solo 401(k) is a great option for freelancers and contractors. These plans come with a $57,000 yearly contribution limit and are funded with pre-tax money.
  • A SIMPLE IRA: A SIMPLE IRA allows you to contribute to your employees’ retirement savings. These plans are best for bigger companies with fewer than 100 employees. 
  • A SEP IRA: A SEP IRA is easy to set up and allows self-employed individuals to contribute up to $57,000 per year. And these plans are flexible, so you’re not required to contribute every year. 
  • Defined benefits plan: A defined benefits plan is great for high-income individuals who are looking to save a lot of money toward retirement. However, these plans can be very expensive and tedious to set up. 
How do I know what plan is right for me?

The best plan for you will depend on a variety of factors, including how much you earn every year, how much you’re looking to contribute, and whether or not you have any employees. You’ll also need to consider how much work you’re willing to put into maintaining your retirement savings every year.

Fora Financial

Editorial Note: Any opinions, analyses, reviews or recommendations expressed in this article are those of the author's alone, and have not been reviewed, approved, or otherwise endorsed by any of these entities.

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