Are you self-employed? What are your retirement plan options?

So you’ve built your business up and now you are at the point of having excess income and you think you should start saving some for retirement.  You don’t have a fancy 401k plan provided for  you with a company match, but you do have some options outside of an IRA or ROTH IRA.  Here are a few to consider:

SIMPLE IRA

  • If you have less than 100 employees, you can set up a SIMPLE IRA for you and your employees
  • Contribution Limits
    • EmployEE can defer up to $13,500 of salary.  If age 50 or over, there is a $3,000 catch up allowed as well.
    • EmployER MUST contribute to employee’s accounts in 1 of 2 ways (3% matching contribution or 2% non-elective contribution)
  • Plan must be set up by October 1.  
  • Deadline for deposits into account
    • 12/31 for employee contributions
    • Employer match can be made by the due date of your business tax return including extensions

SEP IRA

  • Available to any size business
  • Contribution Limit
    • Up to 25% of Salary
    • Only EmployER contributes, no employee salary deferral
    • Employer must contribute equally to all employees
  • Plan must be set up by the due date of your business tax return for the year you want to establish the plan (including extensions).  Example: Susie files for an extension of her 2020 Business Tax Return and has until September 15th, 2021 to send in her return and contribute to her SEP IRA.

Individual 401k

  • Individual 401k
    • Available to business owners with no employees, except a spouse
    • Contribution Limit
      • EmployEE deferrals are the same as 401k plan limits
        • $19,500 or $26K if you are 50+
      • EmployER contributions approximately 20% of net earnings (with some adjustments)
      • Maximum is $57K per year
    • Plan must be set up by December 31st for the year for which you are making contributions
    • Deadline for contributions
      • EmployEE salary deferrals should be made throughout the calendar year
      • EmployER contribution can be made by the due date of the business tax return including extensions
    • The Individual K is the only one of these 3 plan types that allows for ROTH contributions.

These are the most common types of retirement plans for self-employed individuals.  This is just the basics.  There are many deciding factors for which plan to choose.  A good starting point is seeing how much cash is available for contributions.  

If you have questions, I have answers (or I’ll find the answers!)

Financial Journey LLC is a registered investment advisor offering advisory services in the state of Virginia and in other jurisdictions where exempted.  Information provided is for educational purposes only and not, in any way, to be considered investment or tax advice.

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