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Best Retirement Plans For The Self-Employed

Being self-employed means that you may not be open to the perks offered by many employers, but that doesn’t mean that you cannot plan adequately for your retirement. In fact, retirement plans for the self-employed can allow you to save for retirement much better than you would have done with a traditional employer!

With the best retirement plans, entrepreneurs will be able to bankroll a bright retirement. Multiple plan options like the defined contribution plans such as SEP IRA, solo 401(k), and SIMPLE IRA can be considered. These plans also have their defined benefit options.

saving money for retirement when self employed

Best Retirement Plans For The Self-Employed

Here are the best retirement plans for you as a self-employed person which you can consider.

Three of the most popular defined contribution plans that could help a self-employed exceed the regular options include:

Solo 401(k)

You’ll receive all the benefits of a company 401(k) plan and even much more with solo 401(k). You can choose the Roth 401(k) option or the traditional – means that you’ll be able to contribute either after tax or before tax. You may also choose to invest in virtually any asset class too. There are brokers that will offer free solo 401(k) without the need to pay any extra cost.

Solo 401(k) also allows you to make employee contributions up to $19,500 in 2021, and an employer contribution running up to 25 percent of the company’s profits and up to 458,00 between the two. People who are 50 and above can include a catch-up contribution of $6,500.

With this, a self-employed person can exceed the top-out point of a company’s 401(k). This retirement plan may be best considered by a one-person business or one with one person and a spouse. It may be also considered for people who earn quite a lot of income and those who have regular side gigs.

SIMPLE IRA

The SIMPLE IRA is one of the best retirement plans for the self-employed that is a convenient way for employers – including people who are self-employed – to make available a retirement plan for their employees.

An employer will find this plan easier to set up than the complex rules in several 401(k) plans. If you have 100 or less employees that earn above $5000, you can easily set one up.

The SIMPLE IRA is tax-deferred and has similar withdrawal requirements at retirements using the rules of a traditional IRA. Employers can take out wages from employees’ paycheck and can defer up to$13,500 every year. People who are above 50 are permitted to make a $3,000 catch-up contribution.

There are a few options employers are open to with this plan. First, they can contribute up to 2 percent of the salary of a worker up to the yearly compensation limit of $290,000 in the year 2021. Second, they can match up contributions of up to 3 percent salary. Employers are wholly vested as soon as the cash comes, so that any contribution made would directly be in their possession and be theirs.

It is best considered for businesses with a few employees and can make room for companies to offer lower benefits unlike other plans.

SEP IRA

A SEP IRA works with the rules of a traditional IRA, offers a tax-deferred way to save, and is supercharged with a $58,000 maximum yearly contribution limit in 2021. It gives rooms for people who are self-employed to create a retirement plan for themselves and their employees. And because you use this plan doesn’t exempt you from using Roth or traditional IRA.

This retirement plan is widely available and permits businesses to make employer contributions to their employees – self-employed persons inclusive. Several brokers make this plan easily accessible.

The business can contribute the lesser of 25 percent of its annual maximum or its profits. Self-employed people who have high income rates, especially those who are in one-person outfits, would find this suitable.

More Options of Retirement Plans For The Self-Employed

The above listed contribution plans are some of the widely considered plans, but there are more options for the self-employed to set up defined benefit plans. With a benefit plan, you can sock away bigger figures on a tax-deferred basis, but persons with higher income would find it more suitable.

According to a partner at Crewe Advisors in Salt Lake City, Dan Sudit, they are worth considering for people who have substantial employment income.

He added, “The contribution limit is based on a variety of factors including age, income, and years in business, but the annual benefit limit can exceed $200,000 a year.”

Setting up defined benefit plans could however be hectic and can be costly to maintain. But with adequate contribution, the cost may be really worth the trade-off.

“In certain circumstances, depending on whether you make consistent contributions versus a large lump-sum contribution, it can be an effective tool in contributing substantially more dollars to your retirement savings than the other standard qualified retirement plans,” Sudit says.

Depending on your financial situation, especially your income, most individuals may not find a defined benefit plan an option worthwhile for consideration.

Which Of The Retirement Plans For The Self-Employed Is Best?

The best retirement plan to consider depends on a number of factors including your personal circumstances, but if you are the sole employee of your company (even a spouse), you should consider the solo 401(k). The plan opens up all the advantages of a regular company-sponsored 401(k) plan with some additions.

Dan Sudit suggests fitting the plan into your personal situation. “I have a preferential bias to the solo 401(k), because it offers the best of all worlds, taking the greatest benefits of all the other retirement deferral options listed above, with the ability to pick and choose what is best for you.” He says.

He extensively said that the plan gives room for the maximum contribution as an employee, Roth optionality, maximum combined employer/employee contribution, “and generally, tremendous flexibility and other significant advantages allowing self-employed earners to maximize their retirement contributions.”

Here are four unpacked benefits of a solo 401(k)

1. With a solo 401(k), you’ll be able to invest in multiple asset classes with maximum flexibility – depending on the sponsor or broker you harness.

2. A solo 401(k) plan helps you maximize how much you maximize for retirement by being able to make both employer and employee contributions to the account.

3. A spouse can also take part in the plan with the lone exception to the solo 401(k) one employee rule.

4. You can also benefit from the attractive tax-free growth opportunity on the Roth 401(k) plan.

A solo 401(k) may have an edge over SEP IRA

People who do not earn much or who use their business as a side gig may find an edge with the solo 401(k) over SEP IRA.

It gives room for up to 100 percent contribution of your monthly income to the employee’s annual maximum. So, your first $19,500 earned in 2021 can be kept in the solo 401(k) to save you tax charges.

The SEP IRA in contrast permits you to contribute at a rate of 25 percent so you earn more to attain the same contribution level. In addition to the benefit, solo 401(k) also allows you to max out the employer contribution.

After attaining the employee maximum, you can still make a contribution from your company’s remaining profits at a 25 percent rate.
In contrast to the SEP IRA, you’ll still have the capacity to make more contribution to your retirement plan at a reduced income level, all else equal. These differences are some major ones that occur between solo 401(k) and SEP IRA.

Annual 401(k) maximum is capped
It is important that you are aware that the yearly maximum contribution to all 401(k) is capped, and your annual maximum may not be deposited at your main job and your side gig annual maximum sock away too. So, in 2021, you get $19,500 across all your 401(k) plans.

In addition, with your employee contribution max out, a solo 401(k) still gives room for employer contribution at 25 percent of what your company earns. This method helps you save more through solo 401(k).

IRAs Can Still Be Considered By Self-Employed

Even after considering your choice of the best retirement plans – SIMPLE IRA or SEP IRA inclusive – you can still take part in a Roth IRA or a traditional IRA.

So, you can max out your contributions from your choice of the above retirement plans and also benefit from your personal IRA. With this, you can contribute as much as $6,000 yearly and an additional $1,000 bonus if you’re above 50.

You’ll receive the IRA advantages, with added tax-deferred growth, and can also enjoy the best retirement account – the Roth IRA – going as professed by experts.

Wrap Up

The best retirement plans for the self-employed depend on different individual-situation. Solo 401(k) can be a good option as a solo employee, but then, you’ll still need to consider what your focused needs are and the direction your business is going.

“Choosing the right one requires thoughtful planning, because if you rush or are sold on one strategy versus carefully considering your needs and circumstances, you may find yourself feeling short-changed and ill-prepared for your retirement,” Sudit advises.

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