MyGeorgiaAccountant.com

There are many perks to being self-employed, and retirement plan options are one of them. While you won’t benefit from an employer’s matching contributions, you can save much more for retirement as a self-employed individual than with a traditional employer plan. The right retirement plan can allow those who are self-employed to build a significant retirement nest egg.

Two of the most beneficial retirement plans if you are self-employed are the SEP IRA and Solo 401(k). Here is a little about how each plan works, some benefits, and how much you can expect to put away for your retirement.

SEP IRA

Self-employed people can make tax-deductible contributions to a Simplified Employee Pension Individual Retirement Account (SEP IRA) for themselves and their employees. These plans provide you with both personal and business tax benefits.

Since a SEP IRA is a tax-deferred investment vehicle, you don’t pay taxes on your money until you make a withdrawal, usually in retirement. As a business owner, you can deduct a percentage of your contributions to employee plans, but you can also deduct a percentage of your contributions to your own plan.

The IRS has a special computation to determine the maximum deduction you can take on your business taxes for contributions to your own SEP IRA. It can help to have an accountant who can walk you through the IRS contributions guidelines so you don’t exceed IRS contribution limits.

As for SEP IRA contribution limits, you can contribute the lesser of the following for 20221:

• $61,000

• Up to 25% of your earnings

Catch-up contributions for those 50+ years of age are not permitted with a SEP IRA as with other retirement plans.

Something to note if you have employees, you are required to contribute the same percentage to eligible employees’ SEP IRAs as you are your own. So if you are contributing 10% of your own annual compensation, you must also contribute 10% to each employee based on their compensation.

Traditional vs. Self-Directed SEP IRA

With a traditional SEP IRA, you can invest in stocks, bonds, and mutual funds. If you also want to invest in alternative assets, such as real estate, collectibles, and cryptocurrency, you typically will need a Self-Directed SEP IRA. The investment diversity available in a Self-Directed SEP IRA can help better protect your retirement assets. Additionally, if you want control over selecting and managing your IRA investments, you’ll want a Self-Directed SEP IRA.

Solo 401(k)

A Solo 401(k), also referred to as a One-Participant 401(k), has the same requirements and rules as any other 401(k) plan. But for the self-employed, you can put more away into a Solo 401(k) than you can with a company-sponsored plan. As a self-employed business owner, you can contribute to yourself both as an employer and an employee. However, determining how much you’re allowed to contribute gets a bit tricky.

Like any 401(k), a Solo 401(k) has contribution limits. For 2022, the maximum you can contribute to yourself as an employee and employer is as follows2:

• Employee contribution: Up to $20,500 in 2022

• Employer contribution: Up to 25% of your company’s profits

The most anyone can contribute is a combined total of $61,000. Those aged 50 and older can make catch-up contributions up to an additional $6,500, so $66,500 total. However, not everyone qualifies to contribute the maximum. An IRS calculation based on your earned income determines your individual contribution limit. An accountant can help calculate your contribution limits based on IRS guidelines or determine the steps to take if contribution limits are exceeded.

With a Solo 401(k), you can invest in almost any asset class, and you can opt for a traditional or Roth Solo 401(k) depending on whether you want to contribute before or after-tax dollars. However, as an employer, you cannot deduct 401(k) contributions on your business taxes as you can with a SEP IRA.

Retirement Plans for the Self-Employed and Taxes

Whether you choose a SEP IRA or a Solo 401(k) to save for your retirement, you must ensure you follow IRS contribution and tax rules. Shurek Accounting & Tax. can help calculate your contribution limits to either type of account based on IRS guidelines and assist you if contribution limits have been exceeded. They can also ensure you get your full deduction on your business taxes if you contribute to a SEP IRA.

As a final note, even if you contribute to a retirement plan as a self-employed person, you can still contribute to a personal Roth or traditional IRA. Having a personal IRA is just one more way to reduce taxes now or later, depending on your IRA type.

1 SEP Contribution Limits, (including grandfathered SARSEPs)
2 One-Participant 401(k) Plans

Other sources:
SEP IRA vs Self Directed IRA: Which is better?
Best retirement plans for the self-employed