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Retirement Planning

6 Retirement Plan Options for the Self-Employed

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By: Trent Grzegorczyk

Whether you’re a small business owner, freelancer or somewhere in between, being self-employed has many perks, especially when you live in a place like Northern Michigan. You can set your own schedule, prioritize the projects that mean the most to you, and you have the ability to control your own destiny. When you’re self-employed, however, you don’t have the built-in HR benefits that come with being an employee of a company — instead, you need to manage things like retirement savings for yourself.

Fortunately, there are several options when it comes to planning for retirement as a small business owner. Below we touch on six types of accounts you can use to save for retirement being self-employed.

1. Traditional and Roth IRAs

A traditional or Roth IRA is a common choice and is suitable for individuals who are saving less than or up to $6,000 a year or $7,000 for individuals 50 and over.1 There are advantages to both – you will have tax deductions on a traditional IRA, and postpone taxes until you take distributions when you retire. With a Roth IRA, you pay taxes now, but are able to accumulate wealth that is tax free in the future. You can view our 2021 retirement account contribution limits and tax guide here.

2. SEP IRA

A Simplified Employee Pension (SEP) IRA works for those who are self-employed with few or no employees. The contribution limits for these in 2021 is $58,000 or 25% of eligible compensation- whichever is less. There is a $290,000 compensation cap per employee for 2021 ($285,000 for 2020). Employers must contribute an equal percentage of salary for each employee, and you will also be counted as an employee with a minimum of $600 in compensation per year.

3. Solo 401(k)

The solo, or one-participant 401(k) plan is a traditional 401(k) that is for self-employed individuals who do not have employees. You can contribute up to $58,000 for 2021, and if you’re over 50, you have an additional $6,500 you can add as a “catch-up” contribution.3 There are a number of variables that can assist with your contributions, including the special rule for single-member LLCs and sole proprietors: You can contribute 25 percent of net self-employment income. Contributions are made pre-tax and any distributions after age 59½ are taxed.

4. Defined Benefit Plan

A Defined Benefit Plan is a fitting choice for self-employed individuals who are looking to put away more each year than your typical allowed contributions. For 2021, the maximum contribution is $230,000.4 The contribution will be based on how much you will be receiving once you retire, your age and the expected return on your investments. Contributions are tax-deductible in most cases, and the distributions during retirement will be taxed as income. 

For a participant who separated from service before January 1, 2021, the limitation for defined benefit plans under Section 415(b)(1)(B) is computed by multiplying the participant’s compensation limitation, as adjusted through 2020, by 1.0122.

5. Simple IRA

The Simple IRA (Savings Incentive Match Plan for Employees) is ideal for business owners who have 100 or fewer employees. For 2021, you can contribute up to $13,500, with a catch-up contribution of $3,000 if you are over the age of 50. If contributing to another plan, your contributions cannot exceed $19,500. The contributions are deductible, but any distributions during retirement are taxed. Any contributions you make to an employee account is also deductible as a business expense.5

6. Self-Directed IRA

A self-directed IRA (SDIRA) maintains the same eligibility and contribution limits as a traditional IRA. However, an SDIRA enables account holders to invest in alternative assets, such as precious metals, cryptocurrency and real estate. With a self-directed IRA, you are the primary manager of your account, so you choose exactly where to allocate funds. However, with many unique investments available it’s essential that holders understand the regulations and time commitment involved when managing their investments.

Being self-employed certainly has its perks, but it also oftentimes means making big decisions for your future on your own. Before deciding which self-employed retirement plan option to commit to, step back and ask yourself what will work best for your unique situation, ideal future and risk tolerance. You can learn more about how to choose the best retirement plan for your small business by downloading our guide or by clicking the link below to get started with us.

  1. https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-ira-contribution-limits
  2. https://www.irs.gov/retirement-plans/operating-a-sep
  3. https://www.irs.gov/retirement-plans/one-participant-401k-plans
  4. https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-defined-benefit-plan-benefit-limits
  5. https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-simple-ira-contribution-limits

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