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:
Simplified Employee Pensions are indeed simple, able to be set up on a single-page form. They allow you to contribute a tax-deductible amount of up to 25 percent of your net earnings from self-employment, to a limit of $55,000, into a traditional 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 60 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 for 2018, plus an additional $3,000 if you're 50 or older.
While the SEP-IRA is funded solely by the employee’s contributions, with a SIMPLE, the employer is required to contribute.
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 you’re both employer and employee, you can make double contributions: The employee can contribute up to $18,000 for the year (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. 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 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 limited to $6,500 per year, and married couples with combined incomes over $193,000 can’t contribute to a Roth at all.
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