The type of account that works best for each person depends on several factors, including their net income, their age, and if they have employees or a spouse working in the business. The Bedell Frazier Financial Planning Department and your tax professional can provide additional information for those who are self-employed.
Types of Self-Employed Retirement Plans
SIMPLE IRA
Small business owners can open a SIMPLE (Savings Incentive Match Plan for Employees) IRA if they don’t have another retirement plan in place. Under a SIMPLE IRA, contributions made can be deducted by the business, and all employees’ contributions are immediately vested.
- Accumulation Key: The employee contribution limits for 2024 are $16,000 a year to a SIMPLE IRA with a 50 or older catch-up contribution of $3,500. Employers must make contributions for each of their employees, either dollar-for-dollar matching contributions equal up to 3% of their employee’s salary, or a non-elective contribution of 2% of the employee’s salary, whether or not they contribute to the SIMPLE IRA.
- In Retirement Key: Like many other retirement accounts, withdrawals made before reaching age 59.5 may be subject to a 10% penalty in addition to any ordinary income taxes. That penalty rises to 25% if you take the money out within two years of the first contribution to the SIMPLE IRA.
SEP IRA
Another option for business owners is a Simplified Employee Pension or SEP IRA. The main advantage of the SEP IRA is the much higher contribution limit than a Traditional IRA account, up to $69,000 in 2024.
- Accumulation Key: Only employers can make contributions to a SEP IRA. If the business owner is contributing to their own SEP IRA, they must contribute the same percentage to all your employees’ SEP IRAs. For 2024, the employer may contribute up to 25% of an employee’s compensation or $69,000, whichever is less.
- In Retirement Key: SEP IRAs are subject to required minimum distributions and those distributions are taxed as ordinary income.
Roth Component
With the passage of SECURE ACT 2.0 in December of 2022 both SEP IRA and SIMPLE IRAs can offer Roth options. We are waiting on additional guidance from the Internal Revenue Service regarding how this will work.
Solo 401k
A good choice for those who are self-employed with no other employees, except maybe a spouse who works part-time. As with other 401k accounts, you can have a traditional Solo 401k or a Roth Solo 401k.
- Accumulation Key: A great feature of a Solo 401k is the ability to make contributions to the account as both employer and employee. You get the standard $23,000 with the $7,000 catch-up as an employee and as the employer you get to contribute 25% of your compensation. In 2024, the total contributions cannot exceed $69,000, or $76,500 if you are 50 and above.
View our articles on Individual Retirement Savings Accounts and Employer Sponsored Retirement Plans.
Self-employed retirement plans offer a range of options for individuals who work for themselves to save for their retirement years. Self-employed individuals can take advantage of tax benefits and contribute a significant amount of their income towards their retirement savings. Planning for retirement can be daunting, but with self-employed retirement plans, individuals can take control of their financial future and ensure a comfortable retirement. Whether you are a freelancer, consultant, or small business owner, it is never too late to start planning for retirement, and self-employed retirement plans offer a valuable solution to help you achieve your retirement goals.
