Retirement planning is as critical for the self-employed as it is for every cubicle jockey with an automatic 401(k). The biggest difference is: If you run your own business, you’re on your own for creating a plan. Here are the basic options available to most self-employed individuals:
Simplified Employee Pensions are indeed simple, able to be set up on a single-page form. They allow employers to contribute a tax-deductible amount of up to 25 percent of their net earnings from self-employment, to a limit of $55,000 in 2018, into an IRA.
The biggest advantage of a SEP IRA is that increased contribution limit, which blows past the traditional IRA limit of $6,500 for those age 50 and older.
The SIMPLE IRA (for Savings Incentive Match Plan for Employees of Small Employers) is a bit more complicated. It’s designed for small businesses with no more than 100 employees. Contributions are capped at $12,500, plus employer contributions of up to 3% of the employee's compensation for 2018, plus an additional $3,000 for those 50 or older.
A solo 401(k) is an option for sole proprietors and the self-employed who don’t have access to a corporate 401(k). Because they’re both employer and employee, they can make double contributions: The employee can contribute up to $18,500 of earned income for 2018 (plus up to $6,000 in catch-up contributions if you’re over 50), and the employer can contribute up to 25 percent of the business’s total earnings. Total contributions are subject to limit for combined employee and employer contributions of $55,000 for those under 50 in 2018. The employer contributions are also deductible as a business expense.
Defined Benefit Plans
Small businesses still have access to traditional pension plans, which offer a set annual benefit at retirement. The annual contribution is calculated by an actuary, and the maximum annual benefit can be as much as $220,000.
In part because of those factors, though, defined benefit plans can be a pain to administer. The business is legally required have an actuary handle the funding levels and fill out the paperwork for the IRS.
Traditional and Roth IRAs
Traditional and Roth IRAs are available to anyone, self-employed or not. The basic difference between the two: With traditional IRAs, you can usually put away money tax-free and pay taxes when you withdraw it in retirement. With a Roth, the contributions aren’t tax-free, but the withdrawals are. But funding a full retirement with one can be tough. Contributions are generally limited to $5,500 per year [If your income is less than $5500, you cannot contribute more than your earned income] for those under 50 and married couples filing jointly in 2018 with combined modified adjusted gross incomes over $199,000 can’t contribute to a Roth at all this year [or "in 2018"].
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