Starting your own business or gig means trading in the structure and benefits of a regular job for the freedom and flexibility of being your own boss. This also applies to your retirement plans. As a self-employed individual, you have a wider range of options for tax-advantaged plans and investments. Here are some retirement accounts and plans you might want to consider:
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Traditional & Roth IRAs: These are great for those who are newly self-employed or looking for a simple starting point. The contribution limit is $6,000 for 2021 and 2022, or $7,000 if you’re 50 or older. Traditional IRAs allow you to deduct your contributions from this year’s tax return, but you’ll have to pay income taxes on withdrawals during retirement. Roth IRAs, on the other hand, don’t offer immediate tax deductions, but they grow tax-deferred and you won’t have to pay income taxes on withdrawals during retirement. You can open IRAs at nearly any investment brokerage firm and most robo-advisors offer them as an option.
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Self-Directed IRA: This is best for professional real estate investors and advanced investors and traders. The contribution limit is the same as Traditional & Roth IRAs. With a self-directed IRA, you can invest in private assets that you’re familiar with, like real estate. However, these IRAs require you to pay a custodian to ensure you comply with IRS rules, which can be costly.
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SEP IRA: This is ideal for self-employed people with no employees, small family businesses, or those looking for immediate tax deductions. The contribution limit is the lesser of $58,000 or 25% of your income in 2021 and $61,000 or 25% of your income in 2022. SEP IRAs are designed for self-employed people and microbusinesses. They don’t have a Roth option, and the contributions are tax-deductible on this year’s tax return.
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SIMPLE IRA: This is suitable for small businesses with up to 100 employees. The contribution limit is $13,500 in 2021 and $14,000 in 2022, or $16,500 for those 50 and over in 2021 and $17,000 in 2022. SIMPLE IRAs offer an alternative to more complex and expensive 401(k) plans. They’re opened with regular brokerage firms, so participants can choose any securities they like.
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Solo 401(k): This is best for sole proprietors and spouse businesses. The contribution limit is $58,000 in 2021 and $61,000 in 2022, or $64,500 for those 50 and over in 2021 and $67,500 in 2022. With a solo 401(k), you can contribute as both the employer and the employee.
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Defined Benefit Plan: This is ideal for high earners with established businesses and no employees. The contribution limit varies based on age, income, and projected retirement age. Defined benefit plans let you contribute without the hard limits other plans impose. However, these plans come with hefty setup and maintenance fees as well as some regulatory and paperwork headaches.
Being self-employed gives you more flexibility in choosing a tax-advantaged retirement account than W2 employees have. However, you’ll have to fund your accounts entirely on your own. Your ideal plan depends on your income and the size of your business. It’s a good idea to talk to your accountant or financial advisor to discuss the best plan for you and your business.
