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 those who want a simple starting point. The contribution limit for 2021 and 2022 is $6,000 ($7,000 for those 50 and over). Traditional IRAs allow you to deduct the contribution amount on this year’s tax return, but you’ll have to pay income taxes on the withdrawals in retirement. Roth IRAs, on the other hand, don’t give you an immediate tax deduction, but they grow tax-deferred and you won’t have to pay income taxes on withdrawals in 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 know well, like real estate. However, these IRAs require you to pay a custodian to ensure you comply with IRS rules, which can be costly and come with regulatory headaches.
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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 and can be opened at most major investment banks.
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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 ($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 and are great for small businesses with employees.
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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 ($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, which allows for high annual contribution limits.
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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, but they come with hefty setup and maintenance fees as well as some regulatory and paperwork headaches.
Remember, being self-employed means you have more flexibility in choosing a tax-advantaged retirement account, but you’ll have to fund your accounts entirely on your own. Your ideal plan will depend on your income and the size of your business. It’s always a good idea to talk to your accountant or financial advisor to discuss the best plan for you and your business.
