Four Retirement Plan Solutions for the Self-Employed

11th May 2021

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Key Takeaways

  • An Individual Retirement Account (IRA) is a tax-advantaged account that individuals use to save and invest for retirement. A Roth IRA offers tax-free growth and allows qualified withdrawals on a tax-free basis.
  • The Solo 401(k)or Individual 401(k) is a good retirement strategy for successful small business owners and high-earning couples
  • Defined Benefit retirement plans can accelerate retirement income needs and lower taxes of individuals with high self-employment income

Small businesses and self-employed professionals are helping the U.S. grow at its fastest pace in nearly 20 years. In 2020 there was a surge of new businesses – the IRS received a record-number 1.6 applications million applications for new employer identification numbers. This increase in small businesses has created greater interest in retirement planning strategies for the self-employed.

Being a small business owner or entrepreneur is an appealing concept: you have flexibility, independence and the potential for untapped financial success. One downside of being self-employed can be not knowing which retirement plan will build enough wealth and provide a tax shelter. In the article “4 Ways For The Self-Employed To Save For Retirement And Minimize Taxes,” Certified Financial Planner David Rae shares four retirement solutions that can potentially lower your tax liability and build retirement wealth for the future. These plans include IRA, SEP IRA, Solo 401(k) and Defined Benefit plan.

Roth IRA and Traditional IRA

An Individual Retirement Account (IRA) is a tax-advantaged account that individuals use to save and invest for retirement. A Roth IRA offers tax-free growth and allows qualified withdrawals on a tax-free basis. Traditional Roth IRAs allow individuals to contribute pre-tax dollars to a retirement account where investments grow tax-deferred until withdrawal.

SEP-IRA (Simplified Employee Pension Plan)

The SEP-IRA is a traditional IRA for self-employed individuals and small business owners. This plan is one of the most popular retirement plans for small business owners because it offers potentially much higher contribution limits. The maximum contribution for an IRA is $6,000 each year ($7,000 if you are 70 and older) but a SEP-IRA allows a maximum contribution of $58,000.

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Solo 401(k)

The Solo 401(k) or Individual 401(k) is a good retirement solution for many small business owners and high-earning couples. A Solo 401(k) also allows for contributions that are flexible in timing and amount, and participants can make a larger total contribution with the same amount of self-employment income, compared to other options. The cost of implementing a Solo 401(k) has come down in recent years. Also a Solo 401(k) allows for higher contributions than a SEP plan, but provides the same tax benefits of a regular 401(k).

Defined Benefit Plan

Defined Benefit retirement plans can help turbocharge the tax savings and retirement income needs of individuals with high self-employment income as well as owner-only or family businesses. These plans allow for very large contributions and can potentially reduce taxable income by $100,000 or more.

“I am surprised that more business owners aren’t aware of the Defined Benefit Plan. It is essentially a way to both lower your current taxes and create your own personal pension,” says Rae about the Defined Benefit plan. “The benefits of the Defined Benefit plan can be staggering for family businesses. Huge contribution limits can be multiplied when spouses, parents, siblings, and even children are added to the plan—just something to consider.”

Read the full article to learn more about the advantages of these four retirement plans.


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