Retirement Plans if You’re Self-Employed

Being self-employed has a lot of advantages, the biggest of which is being your own boss. But it also leaves you in charge of your own retirement plan, which can be overwhelming. So, what’s the best retirement plan for the self-employed? We’ve  rounded up four of our favorites to help you navigate your future.

1. Simplified Employee Pension (SEP) IRA

It might be for you if … The SEP IRA maximum contribution is 25 percent of the W-2 income you pay yourself. These contributions are tax-deferred and can continue to grow until you begin withdrawals, which you can start doing as early as 59 ½. However, you aren’t required to withdraw from your accounts until you reach age 70 ½. With an SEP, you don’t have to file annually with the IRS, either.

But … A potential limitation of this retirement plan is that you are the sole contributor. This means that if you have employees, they have to be included in this retirement plan, too. You also cannot contribute more to your plan than to theirs.

2. Solo 401(k)

It might be for you if … Since you are both the employer and the employee, you can contribute more to this type of 401(k) than most other self-employed retirement plans. As with a traditional 401(k), all your contributions are pre-tax dollars. (You will pay tax on withdrawals.) As an employer, you can contribute up to 25 percent of your business’s total earnings; as an employee, you can also contribute up to $18,000 a year. Employer contributions can be deducted as business expenses.

But … The rules for who can open a Solo 401(k) are strict. You’re only eligible if you have no employees. And if you have at least $250,000 in your account, you’ll have to file annually with the IRS.

3. Savings Incentive Match Plan for Employees (SIMPLE) IRA Plan

It might be for you if … You can contribute up to $12,500 per year into a SIMPLE IRA (or up to $15,500 if you’re 50 or older). As with the Solo 401(k), you won’t pay taxes on your contributions until you begin to withdrawal. As an employer, you can deduct matching contributions as a business expense.

But … You can’t contribute as much as you could to other retirement plans. And if you have employees, you might have to match their contributions. The money you put into a SIMPLE IRA could also count against the $18,000 you can contribute to your Solo 401(k).

4. Defined Benefit Plan

It might be for you if … Your contributions can grow tax-deferred and written off as business expenses. The Defined Benefit Plan also plays nicely with other self-employed retirement plans. You can contribute to it while also contributing to a 401(k) or SEP IRA. But the biggest advantage is the high contribution limits. While they vary based on age, you could save more than $100,000 a year if you wanted to.

But … Once you commit to putting away a certain amount of money, there’s no going back. You have to keep contributing that amount. These plans also take more time and money to set up, and you have to offer this retirement plan to any employees you have.

Set Up Your Self-Employed Retirement Plan

You’re self-employed because you enjoy flexibility and options. Fortunately, there are retirement plans that can offer both. And you don’t have to navigate the path to retirement alone. For questions on how to protect your future and what matters most to you, contact your Farm Bureau agent.