Self-Employed Choices for Great Retirement Plans

Self-Employed Choices for Great Retirement Plans

Being self-employed gives you a feeling of control over your financial life and future, but it also brings challenges. Income is often unpredictable, and you are still paying into Social Security and Medicare, including both sides, employer, and employee. Then there are the other financial demands for healthcare, insurance, and education.

An overview of the available retirement plans for the self-employed can help you to select one and start building a secure and possibly lavish retirement. The choices are:

  • Solo 401(k) – The Solo 401(k)i is popular because it closely resembles the widely-used 401(k) plans used in small businesses for their employees. The difference is that the Solo 401(k) is for the sole proprietor with no other employees. The one exception is for a spouse also working in the business. The major advantage is that the pre-tax contribution amounts are doubled due to the owner’s ability to contribute both as an employer and an employee. In 2021, the limit for contributions is $19,500 with an additional $6,500 allowed for those over 50 years of age.
  • Roth Solo 401(k) – The rules for the Roth Solo 401(k) are the same except that the contributions are in after tax dollars. The benefit is for those who expect significant income in retirement and higher tax rates. The Roth 401(k) contributions are taxed, but withdrawals in retirement are tax free.
  • SEP IRA – The SEP IRA contributions are in pre-tax dollars and withdrawals in retirement will be taxed. The self-employed individual only makes one type of contribution to the plan. It can be up to 25% of salary capped at $58,000 in 2021. There is no requirement for contributions every year, and contributions can be multiples during the year or a single lump sum.
  • Simple IRA – The Simple IRA (Savings Incentive Match Plan for Employees) is like a 401(k) in that it involves matching contributions. It works best for small businesses with employees but can be set up for a self-employed individual. The contribution limit for 2021 is $13,500 with another $3,000 allowed for those over 50 years of age.
  • Keogh Plan – The Keogh Plan is more complicated to set up than the other options here, but that is offset by potentially greater growth. Keogh Plans are also known as profit-sharing plans. If a “defined contribution” plan, the limitation on contributions is %58,000 annually. If structured as a “defined benefit” plan, the limit rises to $230,000 for 2021 or 100% of the employee’s contribution. Contributions to the plan are pre-tax dollars. A defined benefit plan establishes the benefit that is paid out in the future, while a defined contribution plan establishes the amount that can be contributed to the plan and does not address any future amountii.

With multiple choices, which is best for you depends upon your current financial situation, your planned retirement income and lifestyle, and how you want to be taxed in your business. Get advice from qualified accounting and tax specialists, and you may use more than one of these choices.

i Best Retirement Plans for Self-Employed People –

ii Difference Between Defined Benefit Plan and Defined Contribution Plan –


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