Self-Employed? Here’s a Look at the Plan Options to Maximize Your Retirement

The solo 401(k)

The solo 401(k) (or individual (k)) is perfect for those who are a boss of one. If the plan will only cover you and perhaps your spouse, then you should consider a solo 401(k).

A solo 401(k) generally operates like a standard 401(k), but the individual (k) allows you to contribute up to $61,000 in 2022 with a $6,500 catch-up contribution possible if you are over the age of 50. This is a great plan if you really want to — or can — save aggressively for your retirement every year, or during the years when your business is very successful. You can also utilize the same benefits through a solo IRA model instead if you prefer that option.

Just remember that it is a solo plan and you cannot secure one if you have any employees. You should also know that contribution limits are tied to the person and not the plan. As such, you will be subject to contribution limits placed by any other plan you or your spouse may carry.

Traditional IRA and Roth IRA

If you’re just beginning your career or your potential savings capacity is limited, the traditional IRA or Roth IRA may be the way to go. The plans have a contribution limit of $6,000 in 2022 with a $1,000 catch-up contribution possible if you’re over 50.

The traditional IRA is the simpler of the two, with no contribution or income requirements. It is an individual plan: there are no employee options tied to it.

If you are considering a Roth IRA, you will pay taxes on the funds you commit to the plan. However, you will be able to withdraw your money in retirement free of federal taxes. These benefits only begin after you’ve owned the account for at least five years, and you are not withdrawing the money until you are at least 59 1/2 years old.

SIMPLE IRA

Determining whether the SIMPLE IRA is right for you is often a matter of size. Ideally a SIMPLE IRA is designed for larger businesses — those with up to 100 employees.

If this clause matches your business, the SIMPLE IRA will allow you to contribute up to $14,000 to your retirement in 2022 and an additional $3,000 catch-up if you’re over 50. Your SIMPLE IRA can also work in conjunction with an employer plan to further strengthen your savings. Just remember that the sum of these two plans cannot exceed $20,500 this year.

Another thing to consider with this plan is that, because your employees have their own SIMPLE IRA plans in this model, you could end up obligated to make mandatory contributions to their accounts. While you naturally want to support their retirement, the sum of these contributions could be expensive if your plan has a high adoption rate.

Withdrawing resources from this plan before you’re 59 1/2 also exposes you to a 10-percent penalty as this money will be taxed as income.

SEP IRA

Similar to the solo 401(k), the SEP IRA is a solution targeted toward the self-employed who wish to save aggressively. However, unlike the solo 401(k), the SEP IRA allows you to enroll in the plan even if you have a few employees.

Once you are enrolled, the SEP IRA will allow you to contribute up to $61,000 toward your retirement, though there is no catch-up mechanism with this plan.

While the SEP IRA allows you to have employees and still enroll in the plan, you should know that contributions must be the same for all enrollees. This means if you plan to contribute 15 percent of your income to the plan, the same rate must be contributed by each of your employees.

That said, this plan has less paperwork for you to manage, so if you can find a contribution number that works for you and your team, the SEP IRA could be the way to go.

Video: Small Business Plans

Finding the right plan for you

With so many options it can be difficult to determine which plan is right for your business, now and in the future. If you have questions, we can help. Download our Small Business Guide or contact us today to learn more, and discuss these options with your financial advisor or tax professional.