Not having access to an employer-sponsored 401(k) plan is no reason to delay your retirement. There are many retirement plans available to help fund their golden years. Take a look at the most common self-employed retirement plans and the benefits and annual contribution limits of each.
Which self-employed retirement plans are available to me?
From self-employed 401(k) plans to IRAs, business owners have many retirement plans at their disposal:
Individuals can open either a Traditional IRA (pre-tax, which means you’ll pay income tax on withdrawal) or a Roth IRA (post-tax, contributions made after paying income tax, thus no income tax on withdrawal).
You can have both a Traditional and a Roth IRA; however, the annual contribution will apply across IRAs. These are generally considered to be the most straightforward self-employed retirement plans since a custodian administers the programs, and there are numerous custodians from which you can choose nationwide (e.g., Vanguard, Fidelity, etc.).
The Simplified Employee Pension plan permits business owners to make contributions to each employee’s Individual Retirement Account (IRA) – including their retirement fund. SEP-IRAs are advantageous for companies that are cyclical as contributions need not be made annually and can be adjusted from year to year. The disadvantage of these self-employed retirement plans is that they don’t permit employee contributions.
This option for businesses with 100 or fewer employees permits employees and employers to contribute. Employers must either match the employee’s net income or a choose nonelective contribution. Under the match model, the employer is not required to add money to the account if the employee doesn’t participate. Under the nonelective contribution model, the employer must contribute even if the employee doesn’t chip in.
This self-employed 401(k) plan comes with similar rules as a traditional 401(k) plan and is available to business owners with no employees (other than you and your spouse). The business owner can make traditional (pre-tax) or Roth (post-tax) contributions up to a total of $55,000 in 2018 (plus an extra $6,000 in catch-up contributions for individuals 50 and over). Contributions to a self-employed 401(k) plan can take the form of employer contributions of up to 25 percent of self-employment net earnings and elective deferral contributions of up to $18,500 in 2018.
These self-employed retirement plans for unincorporated businesses (e.g., sole proprietorships, partnerships, and LLCs) have fallen out of favor and have been mainly replaced by SEP-IRAs after tax law changes because they have similar annual contribution limits. Keogh plans come in two flavors: defined-contribution (contributions can be made up to a limit) and defined-benefit (this acts as a self-funded pension plan).
What’s the annual contribution limit for self-employed retirement plans?
The annual contribution limit for self-employed retirement plans varies by the plan type:
: Your total contribution across IRAs can’t exceed $5,500 ($6,500 for people 50 or older).
: Employer contributions to each employee’s SEP-IRA amount to the lesser of 25 percent of each employee’s pay or $55,000 for 2018.
SIMPLE IRA: Employees can contribute up to 12,500 in 2018. Employers must contribute either a matching contribution up to 3 of employee net income (not subject to an annual income limit) or a nonelective contribution of 2 percent of employee net income (up to the annual limit of $275,000 for 2018).
: The business owner can make traditional (pre-tax) or Roth (post-tax) contributions up to a total of $55,000 in 2018 (plus an extra $6,000 in catch-up contributions for individuals 50 and over). For 2018, Employer contributions up to 25 percent of self-employment net earnings and elective deferral contributions of up to $18,500 are allowed.
: Business owners can make a tax-deductible contribution of up to 25 percent of the compensation of $55,000 in 2018.
MileIQ’s blog does not constitute professional tax advice. You should contact your own tax professional to discuss your situation.