3 Retirement Plans Every Entrepreneur Needs To Know About

How Do You Plan For Retirement Now That You're Self-Employed?

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Whether you're just entering the workforce as a newly-minted entrepreneur or you're freshly self-employed after years of being in the traditional workforce, there's no doubt that you have a laundry list of things you need to get done. From the daily machinations of setting up computer systems and phone lines for your business to the big picture plans for your new company, it probably seems as though there aren't enough minutes or hours in the day.

But one key piece of the pie is to set up your retirement account when you're setting up your new business. Learn more about your retirement options.

Key Takeaways

  • You have many options for funding your retirement when you're self-employed, such as a Simplified Employee Pension (SEP) IRA and individual 401(K).
  • You can save for yourself while also offering your staff matched contributions (up to 3%) if you have employees. This would be an option with a Savings Incentive Match Plan for Employees (SIMPLE) IRA.
  • The rules, penalties, and contribution limits vary by plan, so before you understand them before contributing.

Retirement Planning for the Self-Employed

Retirement is most likely the last thing on your mind if you're a young entrepreneur in your 20s or 30s. You may not even be able to envision yourself retiring. After all, you’ve only just begun! But it’s crucial to have the right plans in place for retirement because you're not going to want to work forever. You don’t want to strike it rich with your startup then have nothing to show for it when you reach the age of 65.

There are a number of retirement account options for self-employed workers and small business owners. You just won't have a company plan to help make your decisions

The three most common types of plans that financial advisors recommend for entrepreneurs and small business owners are:

  • Simplified Employee Pension (SEP) IRA
  • Savings Incentive Match Plan for Employees (SIMPLE) IRA
  • Individual 401(k)

Not only do these choices offer all you need for your retirement plan, but some options can also be used if you're a small business owner with employees. Offering a solid retirement plan can be a key component when it comes to attracting and retaining good employees. 

The Simplified Employee Pension (SEP) IRA

A Simplified Employee Pension or SEP IRA is very popular for sole proprietors. It’s an easy account to open. Annual account fees are low or even non-existent. The rules on contributions are also simple. You can invest as much as 25% of your net income up to a cap that changes periodically to keep up with inflation. The cap is $61,000 in 2022, up from $58,000 in 2021.

Contributions are tax-deductible. The SEP IRA also offers some funding flexibility. You can wait until after you’ve filed your tax return to fund the account, so you can make a larger contribution if your income is higher than you thought. This lowers your tax bill. Tour employees can't contribute to the SEP IRA, but they can make their own contributions to a traditional or Roth IRA.

Savings Incentive Match Plan for Employees (SIMPLE) IRA

The SIMPLE IRA may be the account you need if you’re running your own business but looking to expand. You can keep investing even after you’ve hired an employee with this type of an account. But you have to match your employees’ contributions, up to 3% of their pay. There’s also a contribution limit of no more than $14,000 a year in 2022, up from $13,500 in 2021.

Those who are 50 or older can contribute an extra $3,000 each year. This is a catch-up contribution reserved just for older savers.

There will be a 25% penalty if you make a withdrawal from a SIMPLE IRA account within two years of opening it.

The Individual 401(k)

An Individual 401(k) is a popular option for those who are hoping to build up their retirement account quickly and have a lot of money to contribute. It works a lot like a Traditional 401(k). But your spouse can join the plan. Acting as your own employee, you’re able to contribute as much as $20,500 to your individual 401(k) in 2022, an increase from $19,500 in 2021. You can contribute an additional $6,500 in 2022 if you're over age 50.

But this plan isn't available to additional employees. You can only use it if you're a sole proprietor and if it's your spouse who works with you.

You can contribute an additional 25% of compensation in addition to your employee contribution when you're the boss, up to a $61,000 maximum in 2022. It was a $58,000 maximum in 2021. There’s no other restriction on those contributions. You can make them when your business is doing very well to make up for the years when it was harder to make such large contributions.

It’s possible for the two of you to double up on those contributions if you have a spouse in the plan. This applies to the higher limit for catch-up contributions if you’re both 50 or older as well.

This type of account is also a good option if you think you might need to take out a loan for your business. Rules will vary, but you can often take out $10,000 or half the account’s balance, whichever is more, or $50,000 if this is less. You can take five years to pay it back.

The Bottom Line

All these plans are relatively low cost for self-employed individuals. They're easy to administer. You may want to consult with your financial advisor as a first step to figure out which one is right for you and your business.

Think about the range of investment options when you compare plans. Think about the fees associated with managing the account. And of course, one major factor to keep in mind if your small business is supported by a team is whether you need a retirement plan option that allows employees to participate.

Article Sources

  1. IRS. "How Much Can I Contribute to My Self-Employed SEP Plan if I Participate in My Employer’s SIMPLE IRA Plan?" Accessed Feb. 5, 2022.

  2. IRS. “Publication 560, Retirement Plans for Small Business.” Pages 5, 6, 8. Accessed Feb. 5, 2022.

  3. IRS. “Publication 560, Retirement Plans for Small Business.” Pages 10-11. Accessed Feb. 5, 2022.

  4. IRS. "One-Participant 401(k) Plans." Accessed Feb. 5, 2022.

  5. IRS. "Retirement Plans FAQs Regarding Loans." Accessed Feb. 5, 2022.