I am often asked about the best retirement plans out there for the self-employed. There are a lot of choices and depending on your circumstances, one may be more appropriate than another. The “starter” plan is usually an Individual Retirement Account. But there are other options to consider:
Simplified Employee Pension (SEP-IRA)Who it’s for:
- Geared toward those who have up to 25 employees and want to offer a retirement benefit that is easy to operate.
- The lesser of: 25% of your net earnings from self-employment (net profit less half of your self-employment taxes paid and your SEP contribution), up to $56,000 for 2019, with a $280,000 limit on compensation.
- To qualify, complete IRS Form 5305-SEP, or an IRS-approved “prototype SEP plan,” offered by many financial institutions, and by plan administration companies.
- Establish and fund the SEP plan as late as the due date (including extensions) of your income tax return for that year.
- Available to any size business; low cost; no filing requirement for the employer; and open to all eligible employees.
- Only the employer contributes, so the burden is on your shoulders alone; contribution percentages must be equal to the ones you make for yourself, which can add up. There is no Roth version of a SEP IRA.
Savings Incentive Match Plan for Employees (SIMPLE IRA Plan)Who it’s for:
- Best for those with up to 100 employees.
- Net earnings from self-employment up to $13,000 in 2019, plus an additional $3,000 if you’re 50 or older. There is also an employer contribution of either a 2% fixed or a 3% matching. The compensation limit for factoring contributions is $280,000 in 2019.
- Establish the plan by completing Form 5305-SIMPLE, Form 5304-SIMPLE, or an IRS-approved “prototype SIMPLE IRA plan” offered by many financial institutions and by plan administration companies. Contributions made to employee accounts are deductible as a business expense.
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- You can establish a SIMPLE IRA plan at any time Jan. 1 through Oct. 1. If you became self-employed after Oct. 1, you can set up a SIMPLE IRA plan for the year as soon as administratively feasible after your business starts.
- Employees can contribute through salary deferral; less paperwork and testing than a standard 401(k).
- Employers are required to make contributions; there is an early withdrawal penalty of 25% if participants withdraw within the first two years of participation in a SIMPLE IRA.
Solo 401(k) planWho it’s for:
- Geared to those who have no employees (other than a spouse) and have the capacity to sock away a lot of dough.
- Salary deferrals up to $19,000 in 2019, plus an additional $6,000 if you’re 50 or older, either on a pre-tax basis or as designated Roth contributions. You can add another 25% of your net earnings from self-employment for total contributions of $56,000 for 2019. The limit on compensation that can be used to factor your contribution is $280,000 in 2019.
- Plan must be established before calendar year end and funding allowed up to tax filing deadline (including extensions).
- You may be able to put more money into a 401(k) than a SEP due to the way the contribution levels are calculated.
- More paperwork than a SEP.
Defined benefit plansWho it’s for:
- If you make a lot of money and want to sock away a ton for retirement, you can establish you own pension plan. These are very tricky, not to mention expensive, so you will need to spend money establishing and maintaining them and also funding them for a number of years.