Retirement programs for the self-employed range from good to crazy and can save you a lot more than you would with a traditional employer. A well-chosen pension plan can allow entrepreneurs and the self-employed to finance a brilliant retirement.
Self-employed people have several options, including defined contribution plans, such as a Solo 401(k), SEP IRA, and Simple IRA. But they also have specific benefit options.
Here are details on some retirement plans, how much they can save you, and which plan might be right for you.
Popular plans for Self Employed
One of the disadvantages of self-employment is that you don't automatically get perks from many employers, like a 401(k) plan with a company contribution that matches your contributions plans. Self-employed retirees can go far beyond the usual options.
These are the three most popular defined contribution plans and can be useful to anyone considering them.
Solo 401(k)
Solo 401(k) offers all the advantages of a 401(k) business plan and, therefore, gives you more advantages. You can select the Roth 401(k) option, which implies you will have the opportunity to contribute before or after tax. You can also invest in any asset class. Pick a broker that only offers one free solo 401(k), and you won't pay any extra fees.
With a solo 401(k) plan, you can make a salary contribution of up to $19,500 in 2021, as well as an employer contribution of up to 25% of your company's income, up to a total deposit of $58,000. People over 50 can add $6,500 as a catch-up contribution.
Who should consider this plan: Sole proprietorships or those with a single person and a spouse. This can work well for someone who has an extra gig and someone who earns a lot of money.
SEP IRA
A SEP IRA enables the self-employed to generate a retirement plan for themselves and their employees. This type of plan saves deferred taxes, according to the rules of a traditional IRA, but usually with a maximum annual contribution limit of $58,000 in 2021. And using a SEP IRA won't stop you from using a Traditional IRA or Roth IRA.
A SEP IRA lets the business make business contributions to employees, including the self-employed. The business can contribute 25% of its income or the annual maximum, whichever is lower.
Who should consider this plan: Ideal for high-income professionals, especially those in a one-person outfit.
SIMPLE IRA
SIMPLE IRAs are easy for small employers to provide a retirement plan for their employees, including the self-employed. SIMPLE IRAs can be easier to create for an employer than many 401(k) plans that have complex rules. Employers with a hundred or fewer employees and making more than $5,000 can create one.
SIMPLE IRA uses traditional IRA rules, so it is tax-deferred and has the same retirement requirements. Employees can have wages deducted from their salary and can defer up to $13,500 per year, while those over 50 can make a catch-up contribution of $3,000.
Employers can add to the account and have several options: (1) can contribute up to 3% of salary or (2) can contribute up to 2% of a worker's salary up to the compensation limit of $290000 per employee per year in 2021. Employees are vested as soon as they receive the money, so all contributions are immediately yours.
Other options for the self-employed
Defined Benefit Plan
This plan can save you even more money deferred, but it's best for people with consistently higher incomes.
It's worth considering whether your self-employment income is substantial. The contribution limit is based on several factors, including income, age, and years of employment, but the yearly benefit limit can surpass $200,000 per year.
However, defined benefit plans can be more complicated to set up and cost more to maintain.
In certain cases, depending on whether you make large contributions or a large overall contribution, this can be a useful tool to contribute much more to retirement savings than other standard qualified pension plans.
A defined benefit plan is not a profitable option for most people, but it depends on their financial situation and, most importantly, their income.
Which self-retirement plan is the best?
The right retirement plan depends a lot on your circumstances, but for those who are the company's sole employee (including your spouse), the solo 401(k) plan is a great choice. It provides all the benefits of a "normal" 401(k) sponsored plan and then takes you to the next level.
It allows for the maximum employee contribution, the combined maximum employee and employer contribution, the Roth option, and enormous overall flexibility and other important benefits that allow the self-employed to maximize their retirement contributions.
Let's take a look at these benefits:
With a solo 401(k) plan, you can maximize your retirement savings by contributing to an employee and employer account.
You can access a Roth 401(k) and enjoy the tax-free growth of this plan.
You will be able to invest in various asset classes depending on the broker or sponsor you to use, giving you maximum flexibility.
Your spouse can also participate in the program, and this is the only exception to the "one employee" rule for the 401(k) plan only.
A solo 401(k) can be better than a SEP IRA.
The solo 401(k) has another more subtle advantage that may make it a better choice than the SEP-IRA for people with low incomes or for those who use their business as extra work.
Solo 401(k) lets you contribute up to 100% of your salary, up to the employee's annual maximum. In other words, by 2021, the first $19,500 earned can be saved in solo 401(k), which will save you tax. Instead, the SEP-IRA allows you to pay a 25% commission, so you should earn a lot more to achieve the same contribution level.
In addition, the solo 401(k) plan only allows you to maximize your employer's contribution. Once you reach your maximum number of employees, you can still contribute a 25% commission on the remaining profits of your business. So, unlike the SEP-IRA, you can still contribute more to your retirement plan at a lower income level, all other things being equal.
These are some of the principal differences between the solo 401(k) plan and the SEP-IRA, but it can be helpful to understand all of the differences between the two popular programs.
IRAs are an option.
Even if you participate in a retirement plan on your own, including SEP IRA or SIMPLE IRA, you can still participate in a Traditional IRA or Roth IRA.
This way, you can maximize your contributions to any of the above retirement plans and get the most out of your personal IRA. By 2021, that means you'll be able to contribute up to $6,000 per year (plus a $1,000 bonus if you're over 50).
Conclusion
Which pension plan best meets your needs depends on your situation. While the solo 401(k) solo plan is generally a great choice, it's not a good thing if you hire more people than you and your spouse. Therefore, to choose the right plan, you need to think carefully about your needs and your business's direction.
Choosing the right path requires careful planning. If you are in a hurry or convinced of a strategy instead of considering your needs and circumstances, you may feel disappointed and unprepared for retirement.
FOR MORE INFORMATION ON HOW DANIEL P VIGILANTE, CPA, & PROFIT CONSULTANTS CAN BEST HELP YOU WITH YOUR TAX FILING NEEDS, PLEASE CLICK THE BLUE TAB ON THIS PAGE.
THANKS FOR VISITING.
Daniel P Vigilante CPA and Profit Consultants