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6 retirement plan options for the self-employed

Invest in your retirement even if you’re self-employed – and enjoy some tax breaks.

Even if you’re self-employed or run a small business, you have several retirement plan options outside of a 401(k). You can choose from a traditional or Roth IRA, a Solo 401(k), SEP IRA, SIMPLE IRA and a defined benefit plan.

Types of self-employed retirement plans

While there are a handful of self-employed retirement plans out there, each one won’t work for everybody. So we’ll walk you through your options.

Traditional IRA

A traditional IRA is similar to a 401(k). But rather than getting it from your employer, you can open an IRA through most banks and brokerages.

  • How does it work? When you open a traditional IRA, you can fund it at your own pace. And you typically have several investments to choose from. These may include stocks, mutual funds, ETFs and more.
  • Tax treatment: The money you contribute to a traditional IRA is tax-deductible, so you can use it to lower your federal income tax bill. And the earnings you gain from your investments are tax-free as long as they stay in the account. When you make qualified withdrawals at retirement, you owe standard income tax on these.
  • Contribution limits: In 2021, you can contribute up to $6,000 to a traditional IRA or $7,000 if you are 50 or older.

Roth IRA

A Roth IRA may be a good fit if you believe you believe you’ll be in a high tax bracket when you retire.

  • How does it work? You can open a Roth IRA at most brokerages and banks. You contribute to your account at your own pace. Plus, you typically have many investments to choose from, like stocks, mutual funds and ETFs.
  • Tax treatment: Unlike with a traditional IRA, you fund a Roth IRA with after-tax dollars. So you won’t get to deduct contributions from your tax return. But qualified withdrawals are tax-free when you retire.
  • Contribution limits: In 2021, you can contribute up to $6,000 to a traditional IRA or $7,000 if you are 50 or older.

Solo 401(k)

A solo 401(k) may be a good fit if you’re a small business owner with no employees other than your spouse.

  • How does it work? A solo 401(k) works similarly to a traditional 401(k). You fund it with pre-tax dollars. And you typically have many investments to choose from. But contribution limits for solo 401(k)s are higher than traditional 401(k)s and IRAs because account owners act as both employee and employer.
  • Tax treatment: Contributions to solo 401(k)s are tax-deductible, and investment earnings grow tax-free as long as the money stays in the account. When you withdraw money, you are responsible for ordinary income tax on the distributions.
  • Contribution limits: As an employee, you can contribute up to $19,500 or $26,000 if you’re 50 or older. As an employer, you can contribute up to $38,500 regardless of age. Some exceptions may apply depending on your status as a business owner, so it’s best to discuss these limits with a retirement planning and tax professional.

SEP IRA

If you’re self-employed or a business owner with no or few employees, a SEP IRA may be right for you.

  • How does it work? When you open a SEP IRA, you must also contribute to the plans of eligible employees if you have any. You must contribute the same percentage of your compensation that you contribute to your own account. But eligible employees aren’t allowed to contribute to their own accounts.
  • Tax treatment: SEP IRAs work like traditional IRAs for tax purposes. You fund SEP IRAs with tax-deductible contributions, and earnings grow tax-free in the account. Qualified withdrawals are taxed at your federal income tax bracket.
  • Contribution limits: For 2021, the contribution limit for a SEP IRA is the lesser of 25% of net income or $58,000.

SIMPLE IRA

A SIMPLE (Savings Incentive Match PLan for Employees) IRA may be useful for small business owners with 100 or fewer employees.

  • How does it work? A SIMPLE IRA is like a mini 401(k) designed for small-business owners and their employees. When you open a SIMPLE IRA, you must also contribute to the SIMPLE IRA plans of your employees. You can either contribute up to 3% of an employee’s compensation if they contribute to a SIMPLE IRA. Or you can contribute a flat 2% of every employee’s compensation regardless if any contributes.
  • Tax treatment: SIMPLE IRA contributions are tax-deductible, and earnings grow tax-free within the account. Qualified withdrawals are taxed as ordinary income.
  • Contribution limits: In 2021, you can contribute up to $13,500 to a SIMPLE IRA or $16,500 if you’re age 50 or older.

Defined benefit plan

If you’re self-employed and have a high income, you may be interested in opening a personal defined benefit plan, also known as a pension. A pension offers a guaranteed stream of income in retirement, but it can be expensive to administer.

  • How does it work? A personal defined benefit plan is a retirement savings vehicle that requires a certain contribution minimum based on factors like your age and income. If you have employees, you’re generally required to contribute to their pensions as well. As with many retirement plans, you generally have several investment options to choose from, including stocks and mutual funds. But unlike many other retirement plans, a defined benefit plan provides guaranteed payouts regardless of investment performance. This is why pension actuaries calculate how much you need to contribute to pay out those benefits. Personal defined benefit plans are rare, but brokers like Charles Schwab offer these.
  • Tax treatment: Contributions to pension plans are usually tax-deductible up to certain limits, and distributions from the plan are treated as regular income. So you’d pay income tax on these.
  • Contribution limits: Personal defined benefit plan contribution limits are determined by actuaries and are usually quite high. But unlike with other retirement plans, you’d be required to contribute a certain amount each year. According to Schwab, contributions generally “need to be $250,000 or more per year to make the cost of running the plan low relative to the tax savings.”

How do you sign up?

The process for opening a self-employed retirement plan depends on the broker you open it through. But options like SEP IRAs and SIMPLE IRAs may require more paperwork because you’ll also need to set up accounts for eligible employees if you have any. Here’s a general overview.

  1. Visit a bank or broker’s website.
  2. Choose the right self-employed retirement plan for you.
  3. Provide personal information.
    • Name
    • Address
    • Phone number
    • Email
    • Social Security number
    • Bank account information
  4. Choose investment options.
  5. Fund your account.

Compare retirement accounts

These companies are among those offering IRAs or that help manage retirement plans.

Name Product Minimum deposit to open Annual fee Available asset types
SoFi automated investing
$1
0%
Stocks, ETFs
Put your money to work. Let SoFi build and manage a portfolio for you. Pay zero SoFi management fees.
Webull
$0
0%
Stocks, Options, ETFs
Margin financing rates start at 3.99%. No monthly subscription fees for margin.
TradeStation
$2,000
$0 per month
Stocks, Bonds, Options, Mutual funds, ETFs, Cryptocurrency
A platform built for all kinds of traders and all styles of trading
Blooom
$0
$45 per year
Stocks, Bonds
After an analysis, Blooom will place the trades within your 401k, 403b, 401a, 457 or TSP plan account for a low flat fee.
Stash Invest
$0.01
$1 per month
Stocks, ETFs
Stash is more than an investment app. You’ll have access to tools that can help you become a confident investor.
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Compare up to 4 providers

How do you manage your retirement funds?

Most brokers let you monitor your self-employed retirement plan online. One of the best ways to grow your account is to contribute as much as you can to your plan frequently.

But you should also pay close attention to what you invest in. A diversified portfolio that invests in various securities like stocks, bonds and mutual funds may generate more returns than investing in just one asset type.

How do you transfer the existing retirement plan balances?

Moving assets across retirement plans can vary depending on the type of plans and providers. But here are some common rollover steps.

  • Direct rollover/trustee-to-trustee transfer: Contact your current plan administrator and request to transfer your account balance directly to another account. There are usually no tax implications involved when taking this route.
  • 60-day rollover: Your current plan administrator sends you a check for the balance of your account. You have 60 days to deposit that money into a new plan without incurring federal taxes and penalties. However, your current plan administrator will withhold a portion of the account balance for tax purposes. So you must deposit other funds in your new account for it to hold the same balance.

It’s important to pay attention to tax implications of transfers and rollovers if any. In most cases, moving money from a pre-tax plan like a traditional IRA to an after-tax plan like a Roth IRA would trigger income taxes.

Disclaimer: The value of any investment can go up or down depending on news, trends and market conditions. We are not investment advisers, so do your own due diligence to understand the risks before you invest.

Bottom line

Being your own boss has its perks. But it doesn’t mean you should ignore saving for retirement. Luckily, you have plenty of options when it comes to self-employed retirement plans. You can usually open one online through a brokerage. But make sure to compare your options before deciding on one.

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