Published on August 16th, 2022
Whether you’re entering the gig economy or you’re opening your own small business, you’ve got a lot on your plate.
Managing your company’s daily tasks and brainstorming growth is necessary to succeed. You don’t have time for any distractions.
However, planning for your own future is essential, if you want to thrive later in life. You likely won’t want to work forever. So it’s important that you have a money saving plan that allows you to retire when you’re ready.
Unlike many employees who have access to an employer-sponsored retirement plan, you have to save on your own.
The good news is, you’ve got options. Outlined below are five retirement plans for the self-employed.
1. Solo 401(k)
Solo 401(k) plans are available to entrepreneurs and their spouses who have no employees. Folks who want to retire early or simply have a lot of money to save may prefer this option over others.
As a plan participant, you can contribute up to $20,500 in elected deferrals in 2022. This amount bumps up an additional $6,500 if you’re over the age of 50.
These plans also allow employers to match plan contributions. Since you’re both the business owner and the employee, you can determine how much to match. However, there are limits.
Your business can only contribute up to 25% of its profits to your retirement plan. The maximum allowed contribution as of 2022 is $61,000.
2. Traditional IRA or Roth IRA
If you’re looking for an easy way to start saving money consider either a traditional or Roth IRA.
This plan has no business filing requirements and can be used even if you have employees. But if you’re hoping to put back a huge chunk of change, this isn’t the best option. The annual IRA contribution limit in 2022 is $6,000. If you’re 50 or older, this amount increases to $7,000.
When choosing your IRA plan, consider your future tax rate. If you believe that you’ll be in a higher tax bracket when you retire, choose a Roth IRA.
Roth IRA contributions are made with your post-tax money. Think you’ll have lower rates when you retire? Opt for a traditional IRA with upfront tax benefits.
3. SEP IRA
A simplified employee pension (SEP) IRA can be a great retirement plan for solopreneurs or business owners with few employees.
Yearly account fees are practically non-existent, and the contribution rules are simple. Entrepreneurs can invest up to 25% of their net income annually, but there is a cap that changes with inflation. The 2022 cap is $61,000.
But here’s the catch, employers must contribute the same percentage of salary for every eligible employee.
You’re counted as an employee, so if you want to contribute 15% of your income to yourself, you’re obligated to do the same for your other employees.
This may not be a huge deal if you only have a few workers, but it can quickly become expensive if you have a larger team.
4. SIMPLE IRA
Once you’ve scaled your company, consider looking into a savings incentive match plan for employees (SIMPLE) IRA. Experts generally agree that this plan is best for businesses with up to 100 employees.
The annual contribution limit for 2022 is $14,000. Employees 50 and older have the option to contribute up to $17,000.
While the SEP IRA puts the contribution burden on the employer, the SIMPLE IRA splits the savings responsibility.
This retirement plan provides employees the opportunity to contribute via salary deferral. However, as an employer, you’re required to match employee contributions up to 3% or set fixed contributions of 2% for all employees.
5. Defined Benefit Plan
Hoping to spend your retirement taking luxurious vacations and living large? In that case, you’ll want to consider a Defined Benefit Plan.
This retirement option acts like a pension, providing a guaranteed stream of income through your retirement.
These plans allow you to sock away a substantial amount of money. The annual limit is 100% of your compensation for your highest three consecutive calendar years or $245,000 in 2022.
On the flip side, these plans are expensive to set up and have high annual fees. These fees increase if you have employees, and you’ll have to contribute from them as well.
Additionally, Defined Benefit Plans require you to commit to contributing a certain amount each year. If you need to change that contribution for any reason, you’ll get slapped with additional fees.
Work With a Financial Advisor
Not sure which plan is the best fit for you? Consider working with a financial advisor. These money experts have the experience and skill to help you make the most of your contributions.
Retirement can come with some unexpected challenges, and you don’t want to face them alone.
Having an experienced financial advisor on your side can help you navigate those challenges without going broke in the process.
When choosing a financial advisor, it’s important to check their credentials. Certified professionals will have a CFA or a CPA.
These certifications demonstrate their competency in their profession and their commitment to handle your money ethically and responsibly.
As an entrepreneur, you may be tempted to put your business first. But failing to plan for retirement only hurts you in the long run.
Taking the time to choose a retirement plan ensures that you’re taken care of when you’re ready to kick back and relax.
