Self-employed retirement accounts: 5 options to consider

Self-employment is an appealing career path for many people. But there’s one potential drawback: Self-employment doesn’t come with a built-in retirement plan like many full-time positions do.

As a result, if you’re self-employed, you must take responsibility for your own retirement financial security. And if your self-employment turns into a small business with employees, you as the owner will be responsible for your employees’ retirement plans, as well as your own.

Let’s look at some examples of self-employment retirement accounts and how you can determine which is right for you.

Self-employed retirement planning: How much can you save?

Retirement planning while self-employed starts with having a basic understanding of how much you can afford to save for retirement. Look at both your cash flow and your business expenses for the year to see how much you can comfortably put away each month.

An accounting professional can help you decide how best to report revenue and expenses in a way that’s both accurate and beneficial to your business.

Choosing the right self-employed retirement plan

After you have a sense of how much you can afford to put away for retirement, it’s time to find the specific, tax-qualified plan that’s appropriate for you. Two tips before you get started:

1. Understand the IRS tax forms for your business.

The structure of your business will determine which income tax forms you’ll need to file each year. Are you a small business owner with employees? A contract worker out on your own? The answers determine how the IRS will tax your earnings. Check out these guidelines from the IRS to see which filing forms you’ll need, depending on your business structure.

Knowing which forms you’ll need to file will help you calculate the correct income on which to base your retirement plan contributions.

2. Choose a tax-qualified retirement plan that fits your criteria.

You’ve laid the groundwork by following the correct IRS reporting structure for your business. You know how much you’re prepared to contribute to your retirement. That means you’re ready to decide which tax-qualified plan is best for you.

Qualified retirement plan contributions provide valuable tax deductions that help reduce your overall taxes, but each self-employed retirement plan comes with its own set of rules and contribution limits, so keep in mind that “best” really depends on your personal situation.

One thing to keep in mind when planning for retirement is the long-term nature of IRS tax-qualified plans, since there are penalties and taxes if you make withdrawals before you turn 59 ½.

Self-employed retirement plan options

Here are five tax-qualified retirement plan options for self-employed individuals and small business owners.

Self-employed IRA – traditional or Roth

An individual retirement account (IRA) is a good option if you’re saving less than $7,000 for the year, if you’re self-employed, or if you’re leaving a job to start a business. When you have no other qualified retirement plan, IRA contributions are fully tax deductible. (Learn about the differences between a traditional IRA and a Roth IRA.)

• Requirements: Very little setup; no special filing requirements. However, there is an income limit for opening and contributing to a Roth IRA.
• 2025 contribution cap: $7,000 ($8,000 if you’re 50 or older).

SEP IRA for self-employed people

Consider opening a Simplified Employee Pension (SEP) IRA if you are self-employed or have few or no employees, and you aren’t sure if you’ll be able to contribute every year. A SEP IRA follows the same rules as traditional IRAs: Contributions are tax deductible, reducing your taxable income.

• Requirements: Limited paperwork; the IRS provides a model SEP plan document to adopt the plan; no annual reporting to the IRS needed. SEP contributions are employer contributions only, made to your account and to that of any eligible employee.
• 2025 contribution cap: Limited to the lesser of $70,000 or 25% of the first $350,000 net taxable compensation/income.

Note that the Secure 2.0 Act allows Roth contributions to SEP IRAs. Taxes are paid upfront when contributions are made and qualified withdrawals made later are tax-free. Not all financial institutions can accommodate this, however – check with your financial institution to see if it can.

SIMPLE IRA for self employed

A Savings Incentive Match Plan for Employees (SIMPLE) IRA is a good option if you’re self-employed or own a larger business that has up to 100 employees. In both instances, think of yourself as both the employer and employee for contributions to your own account.

• Requirements: The IRS provides model Simple IRA plan documents to adopt a plan, or you have an individually designed plan. Contributions are made up of employee deferral contributions and employer contributions. As the employer, you would need to make mandatory contributions to employee accounts who are eligible and making contributions to the SIMPLE IRA, including yourself.
• 2025 contribution cap for employee deferrals: $16,500, plus an additional $3,500 if you’re age 50-59 or 64 and older. The catch-up contribution limit for individuals aged 60-63 is $5,250.
• If you also work for an employer in addition to your own business, the IRS contribution limits apply to all plans together.

Just as with SEP IRAs, the Secure 2.0 Act allows Roth contributions to SIMPLE IRAs. Taxes are paid upfront when contributions are made and qualified withdrawals made later are tax-free. Not all financial institutions can accommodate this, however — check with your financial institution to see if it can.

Solo 401(k) plan for individuals

A Solo 401(k) is essentially an individual 401(k) for solo business owners or self-employed individuals with no employees. This option, sometimes called a self-employed 401(k), can also include your spouse as an owner to maximize household contribution potential.

When adopting the plan, you may elect to allow Roth contributions if you choose and if your financial institution can accommodate this.

• Requirements: In addition to adopting a formal plan document, you’ll need to file paperwork with the IRS each year once you accumulate $250,000 in your account.
• Solo 401(k) highlight: Think of yourself as two different people – both your employer and your employee. You “both” have the option to make contributions, which allows for a much greater level of saving each year.
• 2025 contribution cap:
  • The employee deferral contribution is the lesser of $23,500 (plus an additional $7,500 if you’re age 50-59 or age 64 and older) or 100% of your earned income.
  • The employer contribution limit is up to 25% of your earned income each year.
  • The combination of your employee and employer contributions together cannot exceed $70,000 (plus $7,500 if you’re age 50-59 or age 64 and older).
  • Note: Due to a provision in the Secure 2.0 Act, the catch-up contribution limit for individuals age 60-63 increases to $11,250.

Self-employed defined benefit plan

A defined benefit plan is a good option if you’re self-employed or a small business owner; have consistent, high income; and want to save a lot for retirement on an ongoing basis. It functions like a pension plan for the self-employed and features much higher contribution limits than other retirement plans. A defined benefit plan can be combined with other retirement plans, including those listed above.

• Requirements: Defined benefit plans require a bit more planning, are more complex to set up and are more expensive to maintain – but the contributions can be far greater. You’ll need to be committed to this type of plan for at least three to five years.
• Contribution cap: Contributions to the plan are mandatory each year and are calculated based on the benefit you’ll receive at retirement, your age and expected investment returns. Depending upon your specific situation, contributions can be $100,000 or more. Contributions are generally tax-deductible.

Self-employed retirement accounts: Know your options

When you’re self-employed, planning for retirement must be a self-driven pursuit. It pays to know what your options are so you can create a solid retirement fund that will help you build a retirement lifestyle that works for you. Your accountant or financial professional can help you weigh your options and make the right choice for you and your business.

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