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Retirement Planning Options to Consider: For Self-Employed & Business Owners

Retirement Planning Options to Consider: For Self-Employed & Business Owners

June 15, 2022

If you’re self-employed and own a business, it’s critical to prioritize your retirement savings. Unlike an employee who might have access to a company retirement program like a 401(k), you must create your own program to save for your future. Our team is here to ensure you have a plan in place, so you don’t feel alone when navigating how to plan for something as crucial as retirement. 
The first step: Determine how much you need to save for retirement with our retirement calculator. The amount you plan to save each year will help determine the best account for you.
The second step: Determine where to put your savings. For self-employed individuals who own their businesses, there are several options for you to choose from. Here are some highlights on each type:

  1. Traditional or Roth IRA – Traditional or Roth IRA is an excellent option for those just beginning. If you’re leaving a job to start a business, you can also roll your old 401(k) or 403(b) account into an IRA. 
  • The IRA contribution limit for 2022 is $6,000 ($7,000 if age 50 or older).
  • Tax deduction on contributions to a traditional IRA.  There is no tax deduction for contributions to a Roth IRA, but withdrawals in retirement are tax-free. 
  1. Solo 401(k) – A solo 401(k) is for a self-employed person (and their spouse, if applicable) whose business has no employees.
  • The total contribution limit for 2022 is $61,000, plus a $6,500 catch-up contribution, or 100% of net income, whichever is less. 
  • This plan works like a standard, employer-offered 401(k): You make contributions pre-tax, and distributions are taxed.  Your business can also contribute based on its net income.
  1. SEP IRA – A SEP IRA is best for a self-employed person or small business owner with no or few employees. 
  • Contributions, when made, must be on behalf of all eligible employees, and cannot exceed the lesser of 25% of the employee's compensation, or $61,000 for 2022. Note: Elective salary deferrals and catch-up contributions are not permitted in SEPs. 
  • On your tax return, you can deduct the lesser of your contributions or 25% of net self-employment earnings or compensation — limited to a $305,000 cap per employee in 2022. 
  1. SIMPLE – A SIMPLE is an alternative to a 401(k) for businesses with up to 100 employees. 
  • Employees may contribute up to $14,000 in 2022, plus a catch-up contribution of $3,000 if 50 or older. If you also contribute to another employer plan, the total of all contributions can’t exceed $20,500 in 2022 ($27,00 if age 50 or older). Employers must contribute either a 3% matching contribution for participating employees or a 2% non-elective contribution for eligible employees. 
  • Contributions are tax-deductible, but distributions in retirement are taxed. Contributions made to employee accounts by the employer are deductible as a business expense.
  1. Defined Benefit Plan – A defined benefit plan, also known as a pension plan or qualified-benefit plan, is an employer-based program that pays benefits based on factors such as length of employment and salary history.  
  • Ideal for self-employed individuals who have a high level of income and consistent business cash flow. 
  • May contribute and deduct more than allowed under the other retirement plans. 

Some of these accounts need to be open and funded in the current tax year, and others by the due date of the tax return for the subject year. It's best to start talking now about your options and lay out a plan to ensure you’re not missing out on any opportunities to save for your future. Contact our office today to receive a complimentary consultation of your retirement account(s).