Explore Tax Advantaged Retirement Plans that are Right for your Business and will Bankroll Your Golden Years

Top contribution plans to save and invest in for retirement

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personal retirement planning


Self-employed retirement plans are in high demand in a changing world. More and more people are choosing to become their own bosses and work for themselves. The benefits are clear for many. It is possible to earn more money and have greater flexibility in terms of life choices.

The economy at large gains from the boost in entrepreneurship, energy, and creativity. This whole new world offers many opportunities and a unique set of challenges.

Being self-employed means that you have more freedom, but it comes with some added responsibilities like handling taxes. Another small drawback is the lack of a retirement plan.

7 Best Retirement Plans for the Self-Employed

Thankfully, there are many options available for independent contractors and small business owners when it comes to personal retirement planning for their golden years. Here are 7 self-employed retirement plans.

1Solo 401(k)

Having an employer-sponsored retirement plan like a 401(k) is one of the perks of working for a company or someone else. Self-employment lacks this benefit, but the solo 401(k) is there to fill the void.

The solo 401(k), also known as “individual 401(k)”, “one-participant 401(k)” or “uni-401(k),” has many of the elements of the employer-sponsored plan.

The one-person 401(k) is mainly designed for a business owner with no employees. However, a participant and their spouse can also use the plan.

The contribution limits for the year 2021 are $58,000. That number goes up to $61,000 in 2022. With a solo 401(k), the business owner is both an employee and an employer.

The maximum contribution on the employee side is $19,500 in 2021 and $20,500 in 2022. For people over 50, an additional $6,500 in the contribution limits is possible. As an employer, a contribution limit of up to 25% of your compensation exists.

In order to set up a solo 401(k) online, an Employer Identification Number is necessary. Moreover, it is harder to set up than some other IRAs.

Withdrawals before the age of 59 ½ are difficult. These plans only allow withdrawals before that age for disability or plan termination.

2Traditional vs. Roth IRA

In the United States, an IRA (individual retirement account) is a popular retirement saving account, and there are two types.

The crucial difference between a traditional IRA and a Roth IRA has to do with tax treatment. For traditional IRAs, contributions are tax deductible.

However, withdrawals in retirement are taxable the same as ordinary income. It is possible to withdraw money at 59½. At the age of 72, minimum withdrawals are required.

Withdrawals in Roth IRAs are tax-free, but the contributions are not tax-deductible. So, how do you even pick between the two types?

Well, if you expect to be in a higher tax bracket later in life, a Roth IRA is more suitable. However, if that is not the case, a traditional IRA is a better fit. In such a situation, it makes sense to get the different tax advantages as soon as possible.

Before making a decision, it is necessary to check your eligibility. The IRS has some income level requirements for a Roth IRA. Because of their flexibility, Roth IRAs are popular recommendations in some corners.

However, the tax break in advance is an interesting plus for the traditional IRA. Those two retirement plans are a good start for someone who is just beginning.

3Simplified Employee Pension (SEP)-IRA

The Simplified Employee Pension (SEP)-IRA is an IRA for self-employed individuals and small business owners. This retirement plan also works well for employers with one or more employees.

It functions like most IRAs. This means the contributions are tax-deductible, and in retirement, withdrawals are taxed as income.

Contribution limits for 2021 are $58,000 and $61,000 in 2022 or up to 25% of your net earnings from self-employment. For the savers over 50, SEP-IRAs do not allow catch-up contributions. Moreover, employer contributions are not mandatory.

Since they do have higher contribution limits than other retirement plans, SEP-IRAs do help save at a faster rate.

SEP-IRAs are easier to set up than a solo 401(k). However, the contribution limits for a sole proprietor are lower than a solo 401(k).

4SIMPLE IRA

The SIMPLE IRA, which stands for Savings Incentive Match Plan for Employees, is also an option for a self-employed individual. It requires less in terms of paperwork and makes it possible to contribute more to your own retirement account.

The employee contribution limit for those under 50 is $13,500 per year in 2021 and $14,000 for 2022. Those who are over 50 get an additional $3,000 catch-up contribution. Loans are not allowed.

For a solo business owner, a solo 401(k) or SEP IRA might be better to maximize retirement savings. SIMPLE IRA is definitely more convenient for a larger business with close to 100 employees.

5Profit-Sharing Plans

As a self-employed retirement plan, profit-sharing stands on solid footing. It gives employees a share of the company’s profits based on quarterly or annual earnings.

The paperwork required for these plans might be a huge burden to some. Employees do not contribute to these plans, only employers do.

The contribution limits are $58,000 in 2021 and 61,000 in 2022. No more than 25% of the compensation is allowed.

6The defined benefit plan

For the self-employed individual with a high income, the defined benefit plan or “pension plan” might be one of the best options. Contributions are tax-deductible, and withdrawals are treated as income.

The main drawbacks have to do with high setup and annual fees. However, this plan does allow you to save more and faster. This could be an important factor if you are close to retirement age.

While the defined benefit plan is not the right fit for most people, it is worth exploring for those who can afford it because the benefits might outweigh the high cost.

7Payroll deduction IRA

Payroll deduction IRAs work like 401(k)s and are very easy to use. A payroll deduction IRA is also one of the least expensive available options when it comes to retirement planning.

One of the top minuses of such a plan is the limited savings. Contributions limits in 2021 and 2022 are $6,000 per year or $7,000, respectively. While this is a place to start, it is definitely not enough to fund a full retirement.

Saving for Retirement Tips and Tricks

Saving money for your personal retirement planning is not a random act, there is important data on how this can be done the right way. Financial experts say that at 30, an individual should have one year of salary as savings.

By the age of 50, the number goes up to five. It is advised to have saved at least ten times your annual salary by age 67.

Putting close to 20% of your gross annual income aside for retirement is a way to reach that goal faster.

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Conclusion

Self-employed retirement plans come in different forms, but they have one thing in common — help you prepare for a better, secure, and more prosperous future.

It is best to start as early as possible, and the help of a financial advisor could have an impact on the process. Each situation is unique and needs to be assessed as such. This is crucial to find the right plan that fits your needs.

Self-employed is a term that covers a wide range of possibilities. It is the same umbrella for the online freelancer or the local small business owner.

The different specificities of those various professions require a lot of attention to make the right recommendation.

The freedom that comes with being self-employed should not be an excuse to neglect something as important as your personal retirement planning.

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Paul Fisher
Freelance writer with a passion for internet marketing and learning. I am happy to embrace the freedom of writing for online publications