Today, you can find a variety of retirement plans with great benefits for everyone. Some offer you the opportunity to save far more than you could with a traditional employee plan.
It is advisable to inspect all the available alternatives so that the choice is the most adjusted to your needs as an employee. You can opt for different plans, including more traditional ones such as SEP IRA, 401(k), and Simple IRA.
What are the best retirement plans for the self-employed?
Although for some workers, it is a disadvantage not to have an automatic retirement plan like those who work for a company, the truth is that they can access better alternatives. Three plans have become favorites for the self-employed:
With this one, you’ll have all the benefits of the company 401(k), but they offer some extra alternatives. You could select Roth 401(k), traditional choices, and other eye-catching options.
On the other hand, you are free to invest in almost any type of asset, and if you choose a good broker, you won’t have to pay additional fees. In 2022 you could make contributions as an employee of up to $20,500 or up to 25% of your company’s earnings.
Between the two, you can make a total deposit of $61,000. For those over 50 years of age, adding another $6,500 as part of the catch-up contribution is possible. You can see that you can have greater benefits than a traditional 401(k).
Now, it is a recommendable alternative for a company where the person in charge is only one person or for those who share employment with a spouse. It is also an alternative for those who earn a lot of money or have a secondary job.
With this option, you can purchase a retirement plan for yourself and your employees. It is an effective way to save tax-deferred and apply the rules of a traditional IRA.
You enjoy a maximum annual contribution limit of $61,000 in 2022. With this plan, you can make employer-to-employee contributions, including self-employed individuals. As a company you can contribute 25% of your profits or the annual maximum, you can choose whichever is less.
With this plan, you do not have the Roth option, and all employees need to be offered the same contribution percentage. It is usually recommended for employers who have high incomes, especially those who are self-employed.
The SIMPLE IRA alternative is for small employers or self-employed individuals who wish to offer their employees a good retirement plan. It is easier to set up than traditional 401(k) plans.
Suppose you have 100 employees or less with a salary over $5,000. You can set up this option. The rules used by this plan are the same as a traditional IRA; it is tax-deferred and enjoys the same withdrawal requirements at retirement.
Deductible wages from paychecks are an option, and you can defer up to $14,000 annually. Those over 50 can get a $3,000 catch-up contribution starting in 2022.
Unlike the above options, it is a plan recommended for companies with a few employees and may allow for a lower total retirement benefit than other alternatives.
How to make the best choice?
Finding the right retirement plan for self-employed is a task that requires a lot of research beforehand and patience to get the best alternative. Before enrolling in any of the options mentioned above, ask yourself the following questions:
- How much can you save each year?
- How much do you want to save annually for your retirement?
- Do you plan to have employees in addition to your spouse? If yes, how many?
- How much time and money can you invest in managing your retirement plan?
After asking all the above questions, you may still have some doubts, that is why it is good to follow the following advice:
- Remember that SIMPLE IRA plans are best for people who are self-employed and will employ a few additional people
- A traditional IRA or Roth IRA is best for those with relatively low income from self-employment
- The 401(k) plan is only advisable for self-employed people with no employees. It is also recommended for the self-employed who expect to earn a high income
- The SEP IRA is best for the self-employed who do not plan to hire employees and are looking to maximize their retirement contributions
How much can I save for retirement through self-employment?
Being self-employed has many benefits – choosing your timetable and working as comfortably as possible. However, there is often concern about how much money you can save for retirement.
Any self-employed retirement plan has different contribution limits ranging from $6,000 with an SDIRA when you are under 50 and can go up to $67,500 with a Solo 401k if you are over 50.