How to Create a Self Employed Retirement Plan

If you are self-employed or a small business owner creating a retirement plan can be overwhelming and confusing. The good news is that there are some great options that are easy to set up without a ton of expense.

Let’s take a look.

401(k)

There is a solo version of the 401(k) available for self-employed people and single business owners, it’s generally the same as traditional 401(k) plans but does not allow for employees or require discrimination testing.

It works like this: You can make contributions as employee and employer up to a total limit of $61,000 (plus catch-ups) annually.

Details:

Maximum $20,500 employee elective deferral contribution FY2022
Up to 25% of compensation as employer profit sharing contribution
Contributions are not required
May access funds through a loan provision
Roth option available
May not contribute if you have employees, except for a spouse who may also participate.
Additional reporting required once account exceeds $250,000.

This is a good option that provides high limits and flexibility over contribution amounts as well as Roth and loan options.

SEP IRA (Simplified Employee Pension Individual Retirement Arrangement)

This is a popular option and with good reason. As the name implies the SEP IRA is easy to set up without the startup and operating costs of conventional retirement plans.

There are substantial contribution limits, the employer generally has no filing requirements, and the plan carries low administrative costs.

Details:

May contribute as much as 25% of compensation up to $61,000 FY2022
Flexible contributions that may be made until your tax filing deadline – lump sum, monthly, skip a contribution year
May be rolled over into most IRA’s and qualified plans and withdrawal rules are generally the same as an IRA
Investment options wider than most employer plans
No Roth option
Participant loans aren’t permitted

With low administrative cost and no filing requirements, the SEP IRA is a great option for high earners in a one-person organization.

SIMPLE IRA

While an available option for self-employed folks, this one is best for small to mid-size businesses with several employees.

Details:

Contribution limit $14,000, plus $3,000 catch-up over 50 FY2022
Employer contributions required - 2% fixed or 3% matching
No Roth option
May be set up anytime between January 1 through October 1
Early withdrawal penalties are significant – 25% within the first two years of participating in the plan, including rollovers.

The SIMPLE IRA doesn’t have a lot to offer to high-earning self-employed people or single person business owners. It’s best for an employer who wants to offer something to employees and keep a lower administrative burden than a more traditional plan.

Defined Benefit Plan

More commonly referred to as a pension, this type of plan allows you to create a guaranteed stream of retirement income. A traditional pension plan comes with a stated annual benefit received at retirement that is usually based on salary and years of service.

Details:

The maximum annual benefit can be up to $245,000 (FY 2022)
Contributions are calculated by an actuary based on the desired benefit amount and other factors including age, expected returns and more.

Sometimes considered a thing of the past pensions still exist and can be a nice option. A defined benefit plan might be a good fit if you are close to retirement and looking to catch-up on your retirement savings. Large contributions are possible, which means you can stash a lot of cash in a short time frame and receive tax benefits at the same time.

There you have it, 4 options that self-employed folks and small business owners can consider in creating a retirement plan. It’s easy to get started and you’ll be happy you did.

As always thoughts and questions are welcomed, let me know how I can help.

-Justin

The opinions voiced in this material are for general information only. This material was created for educational and informational purposes only and is not intended as ERISA, tax, legal, or investment advice. If you are seeking investment advice specific to your needs, such advice services must be obtained on your own separate from this educational material.