Retirement Planning for Self Employed

Retirement Planning for Self EmployedPin

Retirement Planning for Self Employed – 4 Tips

Due to an economy turned upside down by Covid, many individuals have started their own small businesses and became a part of a growing gig economy. Some of these same individuals made a definite choice, and some others, who lost their jobs, were forced into it.

Whatever the case, these workers are confronted by an important issue…retirement planning for self employed individuals. If you’re one of the new gig workers, you may ask the question, when should you start retirement planning, and the simple answer is as soon as you can. Just remember though, the concept of “one size fits all” is not applicable here. We all have different needs, desires, and priorities, and offer you different retirement planning solutions.

Is a Roth IRA or a Traditional IRA Best for me?

For those gig workers, sometimes known as freelancers, that are new to this field, will usually find it much easier to save for retirement using a Roth or a traditional IRA. All that’s usually required is making a contribution.

However, there are other retirement planning options that can provide higher benefits. As an example, for the tax year 2021, the highest amount you can contribute to a traditional IRA is $6,000 if you’re age 50 or younger. If you’re over age 50, the amount increases to $7,000. If you’re new to the self employed gig industry, this might not be a problem, but for those who are well established, the amounts you can contribute may be inadequate. If you’re not up to speed in this area, an adviser who does retirement planning for self employed individuals may be a wise move.

If you’re inclined to use the Roth IRA option, it may be a good choice for you since the Roth option can’t be used for Simple Ira’s or a SEP IRA. But again, Roth contributions also have income limits, so it might not be a good option for those who have higher incomes. These individuals may have use of the “backdoor Roth option, unless Congress eliminates it or limits the amount. When they’re using every possible avenue to raise funds for a budget, anything can happen.

What about a SEP IRA?

Some other popular retirement options for self employed individuals, is the SEP Ira. This type of retirement account requires very little paperwork, and is easy to set up and administer. The primary drawback though, is that SEP IRA’s only allow contributions from the employer. There are no elective deferrals allowed by the employees.

Some of the benefits, however, is that contributions are not required to be made every year, and different amounts can be made. The actual plan can be setup and funded when the tax return is due, and that includes extensions too.

You’ll find much higher limits that can be contributed in a SEP IRA. For an individual considered to be self employed, (Schedule C), the amount contributed is 20%, up to $290,000 of net earnings, for a total limit of $58,000.

For a business that is not considered a self employment structure, the maximum you can contribute is 25% of the employee’s compensation, up to a contribution limit of $58,000. Retirement planning for self employed can be tricky, so be sure to get good advice.

A simple IRA plan

Retirement planning optionsPinSelf employed freelancers, gig workers and other self employed individuals, can also use a Simple IRA plan, as long as they employed 100 or less workers during the tax year. There is also a requirement that it can be the only plan the employer sponsors.

There are a few differences when comparing it to SEP IRA’s. For one, it allows salary deferrals, and for 2021, the amount is $13,500 for those 50 and below. For those 50 and older, the catch up contribution is $3,000. An employer contribution is also required.

The annual contribution for the employer has two options. The first option is the 2% non elective contribution, and is limited to a maximum compensation of $290,000 for 2021. The second option is a dollar for dollar match, and cannot exceed 3% of of employee compensation.

For those who are classified as self employed, they actually wear two hats, meaning they are both the employer and employee. For the current tax year 2021, the maximum Simple IRA contribution is $33,000. $16,500 is the max for the employee and the same amount for the employer match. If these terms and topic confuse you, you need to find an adviser who does retirement planning for self employed individuals for advice.

What about a Solo 401(k) plan?

The solo 401(k) plan has many of the similar rules as the regular plan used by large companies. One of the primary differences, however, is that the solo 401(k) can have no employees except the self employed individual and their spouse. Because of this special rule, the plan is exempt from the complicated high income discrimination testing.

If you’re classified as a self employed individual, you’re allowed to make the following contributions:
1. As the employee, you are allowed to make an elective deferral of 100% of your compensation for the year, but it can’t exceed $19,500 for the year 2021. If you are age 50 or older, you can increase it up to $26,000 in 2021.

2. As the employer, you are also allowed to make a non elective contribution not to exceed 20% of your net earnings, as adjusted. For anyone not classified as self employed,(Sub S Corporation), you have the same limits, but the 20% factor is increased to 25%.

For the tax year 2021, there are limits on the amount that can be contributed to a participant’s account, but not counting the over 50 catch-up amounts. The maximum amount that can be contributed is $58,000, or if lesser, 100% of the individual’s compensation.

Which is the best option for me?

Choosing the best retirement plan for your self can be confusing, and often, challenging. There is no “one size fits all” when it comes to making this important decision. You might want to find a competent adviser who does retirement planning for self employed individuals to get everything all set up. It will be time and money well spent.

Gust Lenglet

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