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Self-Employed Retirement Plan

Self-Employed Retirement Plan



 Today’s topic can be very complicated and is very specialized to your personal and business situation.  My goal today is to give you a few ideas about what the best style for your situation might be.  Below I have listed three different plans that may fit you and your business.  All of these plans have what is called a “catch-up provision” which simply means that if you are 50+ you can contribute a bit more to the plan.  Also, the numbers are based on the 2021 limits so always check the IRS.GOV website for current limits.  As always, I would insist that you consult your accountant or CPA before considering any retirement plan for your business. 



The first type of plan is a SIMPLE IRA.  As the name spells out it is simple to set up and maintain.  Think of it as a low-cost way for you to set up a retirement plan for you and your employees and here are the basics.  You can contribute $13,500 ($16,500 catch-up) or up to 100% of your earned income if you make less than $13,500 annually.  The employer contributes 1-3% based on the income of each participant.  Remember, as the employer, you will have to make contributions on behalf of your employees.  The advantage of this one is that it is a tax advantaged way to provide a low-cost retirement account for yourself and your employees.  The disadvantage is that the contributions are based on a dollar amount and not on a percentage like other programs so the limits may be much lower.  Still, it may be a good fit for your company or just a good place to start.



Next option I would like to discuss is a SEP or SIMPLIFIED EMPLOYEE PENSION.  Like the Simple they are relatively easy to set up and are low cost to maintain.  In this type of plan, only the employer makes the contributions, so it usually fits in a situation where there you are the only employee.  If you pay yourself a W-2 you can contribute 25% of your pay and if you are set up as an LLC and file the appropriate tax documents, the limit is $20%.  You are capped at $58K per year which, as you can see, potentially puts you at a much higher limit depending on your income.  This plan has tax advantages for the company and is easy to set up but can be costly if you are in a situation where you have employees.  For certain small businesses it is a perfect fit.  


SOLO 401k

Lastly, lets talk about a SOLO 401k. There are a lot more moving parts to this one so let’s jump in.  Key to remember with this one is to think of yourself as both the employee and the employer.  To qualify you must have earned income and pay taxes (Federal, State, Local, whatever applies to your area) and payroll taxes.  As the employee you can contribute 100% of your income up to $19,500 ($26,000 catch-up) and as the employer $38,500 not to exceed 20% if considered self-employed or 25% if you are W2.  This can be a great program with its high limits and tax deductibility.  Also, there is a ROTH option available in this plan.  In this arrangement, you cannot have employees but there is an exception to add your spouse which can add several benefits.  Because of the complexity of this program, it is generally more expensive to maintain and when it gets to a certain size, a Form 5500 will need to be filed which adds extra costs.  Even though it might have a higher price tag, the high limits and the tax benefits may make this one the best choice for your business.


In closing, please remember that if none of these fit your needs you can always consider opening an IRA (INDIVIDUAL RETIREMENT ACCOUNT) to save money for retirement.  An IRA is an individual account outside of a company plan and does not affect the contribution limits of the types of accounts above.  They do have lower limits $6000 ($7,000 catch-up) but could have tax advantages depending on your income. 


Thank you for reading and once again I strongly encourage you to consult with a tax professional along with your financial advisor before making any decisions regarding setting up any type of retirement account. 



If you are looking for a financial advisor team focused on your unique financial situation, communicates openly, and that puts you and your goals at the center of the relationship, call us at (480) 507-2425 or contact us online. We’d love to meet you.




The content in this article was prepared by the article’s author. Cetera Advisor Networks, LLC does not endorse its content, and the views expressed may not necessarily reflect those held by Cetera Advisor Networks, LLC.