Best retirement plans for the self-employed
Retirement plans for the self-employed range from good to very good and can save you a lot more than you could with a traditional employer. A well-chosen retirement plan can allow entrepreneurs and the self-employed to fund a brilliant retirement.
Self-employed people have several plan options, including defined contribution plans such as the solo 401 (k), SEP IRA, and SIMPLE IRA. But they also have defined benefit options.
Here are details on some of the best retirement plans, how much you can save, and which plan may be best for you.
Three popular plans for the self-employed
One of the downsides of being self-employed is that you don’t automatically get the benefits that many employers offer, like a 401 (k) plan with company matching on your contributions. But in some ways, self-employed pension plans can go far beyond these regular options.
Here are three of the most popular defined contribution plans that you might find useful.
Solo 401 (k)
The 401 (k) solo gives you all the benefits of a 401 (k) business plan and then gives you even more benefits. You can select the traditional or Roth 401 (k) options, which means you will have the option to contribute before or after tax. You can also invest in virtually any asset class. Choose a broker that offers a free 401 (k) solo – including Fidelity and Schwab – and you won’t pay any additional fees.
With a solo 401 (k), you can make an employee contribution – up to $ 19,500 in 2021 – as well as an employer contribution of up to 25% of your company’s profits, up to a total deposit of $ 58,000 between the two. People 50 and over can add $ 6,500 as a remedial contribution.
As you can see, you can quickly go above a company’s usual 401 (k) plan limit.
Who can it be best for: Single-member or one-person and one-spouse companies. May work well for those who have a gig next door (see below) as well as those who are making a lot of money.
A SEP IRA allows the self-employed to create a retirement plan for themselves as well as for their employees. This type of plan offers a way to save tax-deferred – along with the rules of a traditional IRA – but supercharges it, with a maximum annual contribution limit of $ 58,000 in 2021. And the use of a SEP IRA will not prevent you from using a Traditional or Roth IRA plan (which you really should be doing).
A SEP IRA allows the company to make employer contributions to employees, including the self-employed. The company can contribute the lesser of 25 percent of its profits or the annual maximum. It’s also a widely available plan, with many brokers offering access. However, there is no Roth option and all employees must receive the same percentage of contribution.
Who can it be best for: Best for the high income self-employed, especially those who wear individual outfits.
The SIMPLE IRA is an easy way for small employers, including the self-employed, to offer a retirement plan to their employees. SIMPLE IRA can be easier to set up for an employer than many 401 (k) plans, which have complex rules. Employers with 100 or fewer employees and earning more than $ 5,000 can create one.
The SIMPLE IRA uses the rules of a traditional IRA, so it is tax-deferred and has the same retirement withdrawal requirements. Employees can have their salary deducted from their paychecks and can defer up to $ 13,500 per year, with those over 50 entitled to a catch-up contribution of $ 3,000.
Employers must add to the account, and they have several choices: (1) they can contribute up to 3 percent of wages, or (2) they can contribute up to 2 percent of a worker’s wages up to the annual compensation limit of $ 290,000 in 2021. Employees are fully vested as soon as they receive the money, so any contribution immediately becomes theirs.
Who can it be best for: Better for businesses with at least a few employees and may allow businesses to offer lower benefits than other plans.
Other options for the self-employed
These three defined contribution plans are some of the most popular, but the self-employed should also be aware that they can set up a defined benefit plan. A defined benefit plan can save you even greater amounts of money with a tax deferral, but it’s best for people with consistently higher incomes.
“It’s worth considering if your self-employment income is substantial,” says Dan Sudit, partner at Crewe Advisors in Salt Lake City. “The contribution limit is based on a variety of factors including age, income, and years of service, but the annual benefit limit can exceed $ 200,000 per year.”
However, defined benefit plans can be more onerous to set up and can cost more to maintain. But if you contribute enough, those costs can be worth the trade-off.
“In certain circumstances, depending on whether you make constant contributions or not, a large lump sum contribution, this can be an effective tool to contribute much more to your retirement savings than other standard qualified pension plans,” explains Sudit.
For most people, a defined benefit plan is not really an attractive option, but it depends on your individual financial situation and especially your income.
Which self-employed retirement plan is the best?
The right self-employed pension plan depends so much on your personal circumstances, but for those who are the only employee in the company (including a spouse), the solo 401 (k) is a great choice. It lets you get all the benefits of a “normal” company-sponsored 401 (k) plan, and then take it up a few notches.
Sudit recognizes the need to tailor the plan to your personal situation, but says, “I have a preferential penchant for solo 401 (k) because it offers the best of all worlds, making the most of all other options for postponing retirement. listed above, with the flexibility to choose what works best for you.
He explains: “This allows for the maximum employee contribution, the maximum combined employee / employer contribution, the Roth option and, in general, enormous flexibility and other important benefits allowing the self-employed to maximize their contributions to the company. retirement. “
Let’s unpack these benefits:
- With a 401 (k) solo, you will be able to maximize the amount you set aside for retirement by being able to make both employee and employer contribution to the account.
- You can access a Roth 401 (k) and enjoy the attractive tax-free growth of this plan.
- You will be able to invest in a variety of asset classes, depending on the broker or sponsor you use, giving you maximum flexibility.
- A spouse can also participate in the program, and this is the only exception to the “one employee” rule for solo 401 (k).
A 401 (k) solo may be better than a SEP IRA
The 401 (k) solo has even another more subtle perk that may make it a better choice than the SEP IRA for those on low incomes or those who use their business as a side gig.
Solo 401 (k) allows you to contribute up to 100 percent of your salary, up to the employee’s annual maximum. In other words, in 2021, the first $ 19,500 you earn can be stowed away in the 401 (k) solo, saving you taxes. In contrast, the SEP IRA allows you to contribute at a rate of 25%, so you will need to earn a lot more to achieve the same level of contribution.
In addition to this benefit, the solo 401 (k) also allows you to maximize the employer’s contribution. Once you’ve reached the maximum number of employees, you can still contribute 25 percent of your company’s remaining profits. So, unlike the SEP IRA, you can always contribute more to your retirement plan at a lower income level, all other things being equal.
These are some of the biggest differences between the 401 (k) solo and SEP IRA, but it can be helpful to understand the full range of differences between the two popular programs.
The annual maximum 401 (k) is capped
It should be noted that the maximum annual contribution to all 401 (k) plans is capped and you cannot deposit the annual maximum to your main job and then save another annual maximum on your end. So you get $ 19,500 (in 2021) on all your 401 (k) plans.
That said, if you are maximizing your employee’s contribution to your primary job, a 401 (k) solo still allows you to make an employer contribution at the rate of 25% of your business earnings. So it’s a perfectly legal way to save even more with the power of a 401 (k) solo.
This self-employed retirement calculator can help you determine which plan is right for you.
IRAs are still an option for the self-employed
Even if you participate in a retirement plan as a self-employed person, including the SEP IRA or the SIMPLE IRA, you still have the option of participating in a Traditional IRA or a Roth IRA.
So you can maximize your contributions to any of the above retirement plans while still getting the most out of your own personal IRA. For 2021, that means you can contribute up to $ 6,000 each year (plus a $ 1,000 bonus if you’re over 50.)
You’ll enjoy all of the benefits of an IRA, including tax-deferred growth, and be able to take advantage of what many experts consider to be the best retirement account out there – the Roth IRA.
At the end of the line
Which pension plan is best for you depends on your situation. While the 401 (k) solo is generally a great choice, it’s not a start if you employ more than you and your spouse. So, to choose the right plan, you will need to think carefully about your needs and where your business is going.
“Choosing the right one requires thoughtful planning, because if you rush or are convinced by a strategy rather than carefully considering your needs and circumstances, you may feel aggrieved and unprepared for your retirement,” says Sudit.