Self-Employed? Check Out These Retirement Plans
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Updated for tax years 2022 and 2023.
Being self-employed has its advantages. You don’t have a boss to tell you how many vacation days to take, or what retirement plans you have to choose from.
On the other hand, you don’t have a boss to make you take your vacation time (or to pay for it), or to set up retirement plans for you and encourage you to take advantage of them. You are the boss, and if you want to be ready for retirement, you have to make it happen.
To get started, learn about these options for self-employed retirement plans. One or more of them may be right for you:
Traditional and Roth IRAs
Most people are familiar with Individual Retirement Arrangements, known as IRAs. IRAs are easy to set up and easy to contribute to. If you use a traditional IRA, you may be able to deduct your contributions for the year. That can be a great motivation to get your contribution in.
If you use a Roth IRA, you can’t deduct your annual contributions, but you can take your withdrawals, including interest and other earnings on the account, tax-free after you retire.
You can’t borrow from an IRA. If you take withdrawals from a traditional IRA before retirement, and you don’t meet one of the exceptions, you may have to pay a 10 percent penalty in addition to income tax on your withdrawal.
With a Roth IRA, you can generally withdraw your contributions (but not interest and other earnings) at any time without penalty.
Another downside of IRAs is that you are very limited in how much you can contribute every year. Your maximum contribution is $6,000 per year for 2022 (increasing to $6,500 for 2023), or $7,000 if you are age 50 or older at the end of the year. If you want to make faster progress on your retirement plan, keep reading.
SEP IRAs
SEP IRAs are also easy to set up, as the name “Simplified Employee Plan” implies. It’s a good choice if you’re running late – you have until your business return date, including extensions, to set up a SEP IRA and make matching and nonelective contributions. Anyone with self-employment income can set up a SEP IRA.
You can generally contribute more to a SEP IRA than to a traditional or Roth IRA. The maximum contribution in 2022 is 25 percent of your net self-employment income after deducting self-employment tax, up to a maximum contribution of $61,000 ($66,000 for 2023).
You cannot borrow from a SEP IRA, and you may face a 10 percent penalty if you take withdrawals before retirement.
SIMPLE IRAs
A SIMPLE IRA may be a good choice if you want to set up a savings incentive match plan for your employees, you have 100 or fewer employees, and you do not maintain another retirement plan. You must set up the plan by Oct. 1 of the tax year.
Your employees can make salary reduction contributions to their SIMPLE IRAs of up to $14,000 per year in 2022 or $15,500 in 2023. You can also make employer matches of 1 to 3 percent.
You cannot borrow from a SEP IRA, and you may face a 10 percent penalty if you take withdrawals before retirement. The penalty may be 25 percent if you withdraw funds within two years of the date you first participate in the plan.
Solo 401(k) plans
A Solo 401(k) plan is for entrepreneurs who have no employees, other than a spouse. It’s a good choice if you want to hire your spouse and add them to the plan. It’s also a great idea if you want to contribute a lot to your plan.
As a business owner, you contribute to your own plan as both an employer and an employee. For 2022, you can contribute up to $20,500 or 100 percent of your compensation or earned income. As your own employer, you can contribute another 25 percent of your compensation or earned income. For 2023, the limit is increasing to $22,500.
For 2022, you and your spouse may each be able to contribute up to $61,000 per year (plus an additional $6,500 per year if age 50 or older at the end of the year). For 2023, you can both contribute up to $66,000.
A Solo 401(k) plan may have higher administrative costs than other choices. You may be able to borrow from it if your plan is set up to allow it.
This article is for informational purposes only and not legal or financial advice.
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