Retirement Plans for Self Employed Individuals

One of the advantages to being a small business owner is the retirement plan options available to you that are not available to most taxpayers. A retirement plan can benefit you, your business and your employees. As a small business owner these benefits include tax deductible employer contributions, tax free growth of assets, tax credits and other benefits that may help reduce costs. In addition, retirement plans can attract and retain better employees. The benefits to your employees include contributions and gains are not taxed until distributed, reduced taxable income, easy contributions made through payroll deductions, and retirement assets can be carried from one employer to another.

In addition to the standard traditional IRA and Roth IRA options available to most taxpayers small business owners have additional options some of which are listed below.

Solo 401K

Ideal for a business owner with no employees other than a spouse if applicable. The business owner wears two hats in a solo 401(k) plan: employee and employer. Therefore, contributions can be made to the plan in both capacities.

• Make annual salary deferrals up to $20,500 in 2022, ($19,500 in 2021 and in 2020; $19,000 in 2019), plus an additional $6,500 in 2022, in 2021 and in 2020 ($6,000 in 2015 - 2019) if you're 50 or older either on a pre-tax basis or as designated Roth contributions.

• Contribute up to an additional 25% of your net earnings from self-employment for total contributions of $61,000 for 2022 ($58,000 for 2021; $57,000 for 2020 and $56,000 for 2019), including salary deferrals.

In general, in order to make a contribution you must establish your solo 401(k) plan and make your employee contribution election by the end of the calendar year.

Note: When figuring the contribution, compensation is your “earned income,” which is defined as net earnings from self-employment after deducting both one-half of your self-employment tax, and contributions to yourself.

Simplified Employee Pension Plan (SEP IRA)

Ideal for small business owners with no or few employees. Simplified Employee Pension plans can provide a significant source of income at retirement by allowing employers to set aside money in retirement accounts for themselves and their employees solely through employer contributions.

• Contribute as much as 25% of your net earnings from self-employment (not including contributions for yourself), up to $61,000 for 2022 ($58,000 for 2021, $57,000 for 2020 and $56,000 for 2019).

• Set up the SEP plan for a year as late as the due date (including extensions) of your income tax return for that year.

When figuring the contribution for your own SEP-IRA, compensation is your net earnings from self-employment less one-half of your self-employment tax and contributions to your own SEP-IRA.

Employer contributions for each eligible employee must be:

• Based only on the first $305,000 of compensation for 2022 ($290,000 for 2021, $285,000 for 2020)

• The same percentage of compensation for every employee

• Limited annually to the smaller of of $61,000 for 2022 ($57,000 for 2020) or 25% of compensation

• Paid to the employee's SEP-IRA

You do not have to contribute every year but when you do, you must contribute to the SEP IRAs of all participants who actually performed personal services during the year for which the contributions are made, even employees who die or terminate employment before the contributions are made.

Note: Elective salary deferrals and catch-up contributions are not permitted in SEP plans.

Savings Incentive Match Plan for Employees (Simple IRA)

Ideal for larger businesses with up to 100 employees that want to encourage employee contributions and provide an annual employer contribution. Employer contributions for yourself must be the same type and rate as the contributions you make for your common-law employees. You must either:

• match your salary reduction contributions dollar-for-dollar up to 3% of your net earnings from self-employment; or

• make a non-elective contribution of 2% of your net earnings from self-employment that do not exceed $305,000 in 2022 ($290,0000 for 2021 and $285,000 for 2020).

Employees may elect to contribute and are always 100% vested in (or, has ownership of) all SIMPLE IRA money.

These accounts provide huge benefits when setup correctly and serious tax implications if not. They may also require different types of paperwork. There are several other types of retirement plans other than those listed above so please consult with a tax professional or financial planner to find a plan suitable for you.