Self-employed individuals face a unique challenge when it comes to planning for retirement. Without access to employer-sponsored retirement plans, it’s up to you to select and maintain the right retirement account to meet your financial goals. The good news? There are a variety of tax-advantaged retirement plan options available specifically for freelancers, small business owners, and other self-employed people. Understanding these plans can help you determine which individual retirement accounts align with your taxable income, business structure, and long-term savings strategy.
SEP IRA: Simplified and Scalable
A Simplified Employee Pension (SEP) IRA is a popular choice among self-employed individuals and small business owners. Contributions are tax-deductible, and you can contribute up to 25% of your net earnings from self-employment, up to the annual contribution limit set by the IRS. SEP IRAs are easy to set up and maintain, making them an ideal solution for sole proprietors or LLCs with few or no employees. There are no annual filing requirements for the employer, and you maintain control over the retirement account.
Solo 401(k): Maximum Flexibility and Contributions
Also known as a one-participant 401(k), a Solo 401(k) is available to self-employed individuals with no employees other than a spouse. This plan allows for higher contribution limits than a SEP or SIMPLE IRA by enabling you to contribute as both an employer and an employee. You can make elective deferrals up to the annual IRS limits, plus up to 25% of compensation as an employer contribution. There are Roth and Traditional options available, and catch-up contributions are permitted if you're age 50 or older. If your goal is to maximize your retirement savings, a Solo 401(k) may be a strong choice.
Roth IRA and Traditional IRA: Flexible Individual Options
Even if you’re contributing to a self-employed retirement plan, you can also contribute to a Traditional IRA or Roth IRA, depending on your modified adjusted gross income (MAGI) and tax filing status. Roth IRAs offer the potential for tax advantages like tax-free withdrawals in retirement, while Traditional IRAs offer tax-deductible contributions and tax-deferred growth. Both account types are widely available and can be used in combination with other retirement plan options to help build a diversified savings strategy.
Defined Benefit Plans: A Fit for High Earners
For high-income earners seeking large income tax deductions and significant retirement contributions, a Defined Benefit Plan may be worth considering. These plans are more complex and require actuarial services, but they allow for higher contribution limits than other self-employed retirement plans. They can be particularly advantageous for older business owners who are close to retirement and looking to make up for lost time.
Other Considerations
When choosing a plan, consider your earned income, business structure, number of employees (if any), and your long-term retirement savings goals. Also factor in plan eligibility, whether you'll need catch-up contributions, the tax benefits you're seeking, IRA rollovers, and how much flexibility you want with distributions and early withdrawals.
If you're self-employed and ready to establish a retirement plan tailored to your needs, the experienced team at Mainstar Trust is here to support you. With decades of experience serving self-employed individuals, small business owners, and freelancers, we offer the account options and custodial services to support your self-employed retirement plan. Contact us today to learn more about getting started.