A traditional IRA or a Roth IRA are best for people with relatively low self-employment incomes. SEP IRAs work best for self-employed people who don't plan to have employees in the future and who want to maximize their retirement contributions. . It's usually the same as other 401 (k) plans, but because there are no employees other than your spouse who work for the company, you're exempt from discrimination testing.
However, self-employment is becoming increasingly popular in the U.S. UU. In addition, a significant percentage of those who are self-employed do not regularly save for retirement. But while it's true that these people don't have all the same retirement savings options as the average employee, there are still plenty of plans you can use to save.
These plans include 401 (k) plans, simple IRAs, SEP IRAs, and Keogh plans. There are several solid retirement savings options for the self-employed, whether you're a sole proprietor or the owner of a small business with several employees. SEP IRAs, SIMPLE IRAs, individual 401 (k) and Keogh plans are some of the best, so make sure you know what makes sense given your financial situation before making any final decisions. Fortunately, there are several retirement plan options for self-employed workers, but each has its own benefits and limitations.
In the end, I decided on an individual 401 (k) plan for my business, but that doesn't mean it's the best option for everyone. Also referred to as a single-participant 401 (k), uni-k, or single-participant k, the individual 401 (k) is specifically designed for small business owners who have no employees (except their spouse, if applicable). In general, an individual 401 (k) works in a similar way to an employer-sponsored 401 (k). You'll make contributions with pre-tax money, and these contributions will increase with deferred taxes until you make withdrawals when you retire.
Unlike an IRA, you may be able to set up a loan option with your individual 401 (k), although it will involve interest charges. In addition, doing something like applying for a 401 (k) loan to pay off a debt and taking out a loan starting in your own retirement should be considered only as a last resort. Because of the way an individual 401 (k) plan is set up, you might consider it if you're an independent contractor or a sole proprietor with no salaried employees, you can still qualify even if you employ your spouse. A simplified employee pension IRA is a type of IRA that you can set up to benefit you, your employees, or both.
The main difference between an SEP IRA and a traditional or Roth IRA is that only an employer can contribute to an SEP IRA. If you want to make separate contributions to a traditional or Roth IRA, you can. However, in some cases, you may be allowed to make personal contributions to your SEP IRA. An SEP IRA is for business owners who want the simplicity and cost loss of an IRA, but with a much higher maximum contribution.
There's also less paperwork than with an individual 401 (k) plan. Because the SIMPLE IRA is designed like a traditional IRA, your contributions are tax-deductible in the year you make them, and your earnings will increase with deferred taxes. You can also contribute to a traditional or Roth IRA on your own. Consider a SIMPLE IRA if you want the opportunity to contribute as a business owner and as an individual, but don't expect to need the higher plan contribution limits of an individual 401 (k) plan.
Technically, a health savings account isn't a retirement plan, but you can use it to set aside money for your retirement. You can use this account in addition to one of the other retirement plans for the self-employed and a traditional or Roth IRA. In fact, I contribute to an individual 401 (k) plan and an HSA every year. HSAs are available to taxpayers, including business owners, who have a high-deductible health plan.
In other words, your HSA contributions are tax-deductible, and you won't pay any taxes when you make withdrawals for eligible medical expenses. If you make withdrawals for ineligible reasons, the amount will be subject to income taxes plus a 20% penalty. That said, if you keep your HSA funds until you're 65 or older, withdrawals for non-medical reasons will continue to be subject to income tax, but not to the additional 20% penalty. As a result, an HSA can function in a similar way to a tax-deferred retirement account.
Of course, you can also use HSA funds to pay for healthcare costs during retirement and avoid all tax-related costs. If you qualify, consider an HSA as a way to supplement your other retirement contributions. However, keep in mind that any ongoing medical expenses can make it difficult to use funds to save for retirement. Again, you can opt for this option if your income and tax rate are lower now than you expected them to be when you retire.
Like a 401 (k) plan, the SIMPLE IRA is funded by tax-deductible employer contributions and pre-tax employee contributions. Robo-advisors such as Betterment and Wealthfront offer automated planning and portfolio creation as a low-cost alternative to human financial advisors. With these four options, your contributions are tax-deductible and you won't pay taxes as they increase over the years (until you withdraw them in retirement). Keep in mind that contribution limits apply per person, not per plan, so if you also have an outside job that offers a 401 (k) plan, or your spouse has one, the contribution limits cover both plans.
They represent a heavy administrative burden each year and require a commitment to fund the plan with a certain amount per year. Both plans are designed with sole proprietors in mind and are easy to set up and maintain, while maximizing savings. Its simplicity and flexibility make the plan more convenient for single-person businesses, but there's a downside if you have people working for you. Set up the SEP plan for one year as late as the due date (including extensions) of your income tax return for that year.
Request your copy of the printed edition of the Investopedia Retirement Guide for more help creating the best plan for your retirement. To avoid penalties with any of these plans, you'll have to leave your savings in the account until you're 59 and a half years old. The plan also offers flexibility to vary contributions, make them in a lump sum at the end of the year, or omit them entirely. You won't need to do as much paperwork to create one as you would with a Keogh plan, and you'll be able to maximize retirement savings for your employees and yourself.