Self-Employed Retirement Plans: These Are Your Options

There are all kinds of self-employed and all kinds of ways to put money aside for retirement.

But often those who are self-employed don’t put money aside for retirement. They think they have no time or money.

Neither is true. You can start a retirement account with any amount of money – the important thing is to get started. And we cover the nuts and bolts of the various options for a stand-alone.

What is an Independent Retirement Plan?

People with employers typically have retirement plans such as an IRA or 401k. Self-employed can have the same type of plans and they are easy to start.

Financing retirement for the self-employed is not something to fear or avoid. The sooner you start, the faster those accounts will start to grow.

How to choose the best option for independent retirement?

As a self-employed person you are also an entrepreneur. That gives you options regarding premium limits for certain plans. We’ll discuss the details of the retirement plans later. In the meantime, here are things to keep in mind as you learn more:

For taxes? – If you choose to contribute self-employment income before that income is taxed, the amount you contribute will be deducted from your gross income (called modified adjusted gross income) when you file your tax return. When you withdraw the money, it is taxed. After tax? – If you choose to contribute taxable money, you can make tax-free withdrawals later. Contribution Amount – If you choose an IRA, your annual contribution limit is set at $6,000 for a single person (or $7,000 the first year you open the IRA as a catch-up contribution). If your self-employment income is high, you may want to choose retirement savings with higher contribution limits, such as a 401k or Keogh. Your Age – If you are young, you can opt for an IRA or 401k plus a Health savings account. You can contribute $3,650 to an HSA (in 2022), and you can withdraw that money tax-free as long as it’s used to pay for medical expenses. If you make a lot of money, or are old, you can choose to quickly build up retirement savings with an account such as a Keogh. With a Keogh you determine the schedule for the timing and amount of contributions.

8 retirement accounts for the self-employed

Here are the details for self-employed retirement planning.

1. Standalone 401 k

As a self-employed person you are both an employee and an employer. Although it is a solo 401k, you can make contributions as both employee and employer contributions. That makes the solo 401 ka the best choice in retirement plans for the self-employed.

Contribution Limit: The employee contributions to the 401k can go up to $19,500 (plus another $6,500 if you’re over 50). The employer contribution can bring that individual 401,000 annual contribution to a total of $55,000.

Tax Benefits: Contributions to a solo 401k are pre-tax and deducted from your gross income.

2. Self-Employed IRA (Simplified Employee Retirement or SEP IRA)

The SEP IRA is structured differently from the traditional (or Simple IRA) and Roth IRAs.

To start a SEP IRA, you must make less than $122,000 as a single or $193,000 married.

Contribution limit: The contribution limits are a maximum of 25% of the income, based on the standard income limits.

Tax Benefits: Contributions are pre-tax dollars and are deducted from gross income.

3. IRAs

For a simple IRA retirement account, there are two types, traditional (Simple IRA) or Roth IRA. Both are easy to start and often offered by an investment company or financial institution.

With the Roth, IRA contributions are taxed before they are contributed and are part of the self-employed person’s net income. That means the Roth IRA funds are not taxed when they are withdrawn.

With a traditional IRA, the pre-tax contributions are in dollars and are deducted from gross income. When withdrawing from the traditional ira retirement account, the funds are taxed.

Contribution limit: $6,000 per year ($7,000 the first year as a catch-up contribution) per year. If you’re looking to contribute more, a 401k might be a better choice ($19,500).

Tax Benefits: The pre-tax contribution for a traditional IRA is pre-tax and is deducted from gross income tax. With the Roth IRA, contributions are after-tax dollars. You pay no tax on the Roth IRA funds when you withdraw them.

4. Self-employed Social Security

The money ends up in this account through self-employment taxes. This is in addition to income tax. Taxes for the self-employed are 15.3%, with 12.4% for Social Security and 2.9% for medical care.

Contribution Limit: If you earn more than $400 a year, you must pay self-employment tax. The amount you contribute is based on your net income. Half of the social security tax is generally tax deductible, as “normally” half would be paid by an employer’s contribution.

5. Profit Sharing Plan

A profit-sharing plan is also known as a Keogh plan. As an employer you pay a premium.

The profit-sharing or Keogh plan is like a pension, but you as an employee can decide for yourself what you want to receive annually as part of your pension plans. Based on that goal, you make a schedule of contributions.

As an employer, you can use a Keogh plan to make contributions into employee accounts. If you do, that amount is tax deductible from your company’s taxable income.

Contribution Limit: The maximum annual benefit is a contribution of up to $225,000.

Tax Treatment: The amount you contribute to your account is on a tax-deferred basis. The amount that you as an entrepreneur pay to employees is deducted from the taxable income of the company.

6. Cash Purchase Plan

Cash purchase plans are also known as defined benefit plans. A defined benefit plan is an excellent choice if you started saving late and want to make a catch-up contribution to a plan.

You draw up the plan with a fixed amount for the annual premium limit. The annual contribution is tax-deferred growth.

As an employer, you can offer a money purchase plan as part of eligible workers compensation, by depositing the money into their individual retirement accounts. There is no annual benefit limit for these defined contribution plans – you determine the amount.

Contribution limit: The limit is set by the employer.

Tax Benefits: Small business owners can offer a cash purchase plan as a perk. If an employee leaves the company, the money can be transferred to other retirement plans, received as a lump sum, or used to purchase an annuity.

7. Savings Incentive Match Plan for Employees

This is also known as the initials SIMPLE. The SIMPLE Plan can be set up by one person or for employees, as an occupational retirement plan for a small business with fewer than 100 employees.

Either way, the SIMPLE retirement plan has a tax benefit for entrepreneurs. Any employee who earns $5,000 or more can have an employer-funded individual retirement account.

Contribution limit: A maximum of 3% of the annual income is the maximum employer contribution.

Tax Benefits: Small business owners who offer this to employees get a tax deduction based on the amount the owner contributes. And it’s a nice perk to offer as part of the workers’ compensation.

8. Health Savings Account

It is important to realize this requirement before starting an HSA – your health insurance policy must have a deductible of $1,350 or higher ($2,700 for family plans).

If you’ve maxed out your annual contributions to traditional and Roth iras, sep iras, or 401 ks, an HSA has tax benefits. You contribute pre-tax dollars, which are deducted from your gross income.

Contribution limit: $3,650 for a single person, $7,300 for families (2022 figures).

Tax benefits: You can withdraw the HSA money tax-free as long as the money is used for medical expenses (health, eyesight and/or dentistry). After you turn 65, you can use the money for any purpose, but it will be taxed at the rate of your ordinary income.

How do you open a pension scheme for the self-employed?

Your first step is to choose the plan that fits. You should consider things like how much you can afford to contribute given your personal financial situation and goals. If you want to contribute more than the $6,000 IRA, you’ll need a plan that allows you to make additional catch-up contributions.

One of the best resources to learn more before making that decision is the IRS.

Managing your pension funds

Some plans are easy to start, but to get the best value for your money, you should consult a financial advisor.

With a 401k, you can start recording at age 59 1/2. With SEP IRAs, Roth and traditional IRAs, you must make the required minimum distributions by age 70 1/2 or 72 (depending on your date of birth).

You need a plan for how you are going to use that money after withdrawals.

What is the best pension plan for the self-employed?

A traditional or Roth ira is an easy way to get started. The first year, you can make an additional $1,000 catch-up fee on top of the $6,000 annual maximum. The premiums are deducted from your gross income, reducing the tax you pay on your net self-employed income.

With the SEP IRA or self-employed 401k, the annual self-employed contribution can be higher.

The HSA makes a lot of sense. Some of the most affordable health plans are affordable because they have a high deductible.

How much can a self-employed person set aside for his pension?

There are no limits. The amount you can save depends on the type of retirement plan product you can afford and choose.

Do the self-employed pay social security?

Yes. Social Security is paid as part of the self-employment tax. The self-employment tax is 15.3%, with 12.4% for social security and 2.9% for medical care.

Is an IRA better than a 401k?

Both are funded with pre-tax dollars and are taxed upon withdrawal. The contribution limit for an IRA is $6,000. A 401k can be “double funded” by you as an employer and employee, up to a total of $55,000 per year. If you can afford it, you can save more faster with a 401k. You can also have both types at the same time.

You can have more than one IRA, but your total annual contribution to all your IRA accounts is limited to $6,000.

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