HOW TO SAVE FOR RETIREMENT IF YOU'RE SELF-EMPLOYED

Today we're diving into a crucial topic for self-employed individuals: retirement savings. As a self-employed person, planning for retirement requires a strategic approach beyond just using IRAs. Let's explore the two main options I use with my clients: the SEP IRA and the Solo 401(k) (also known as a Solo-k or Indy-K).

SEP IRA: Simplified Employee Pension IRA

The SEP IRA is a straightforward retirement savings option for self-employed individuals. Here's what you need to know:

1. Simplicity: Setting up a SEP IRA is easy. You only need to fill out IRS Form 5305-SEP to start your plan, which means you can save some money on fees for setting up a plan. You can then choose where you want to open up the accounts.

2. Higher Contribution Limits: In 2024, the business can contribute up to $69,000 or 25% of your compensation (whichever is less), making it an attractive option for substantial retirement savings.

3. Employer Contributions Only: You can only make contributions into a SEP from the business, not as the employee.

4. Tax Benefits: Contributions made by the business are tax-deductible for the business, providing immediate tax advantages.

5. Eligibility: To qualify, you must be at least 21, earn more than $650 per year, and have worked for three of the last five years.

The big thing that a SEP IRA lacks is post-tax (Roth) contribution options. All contributions into a SEP are tax deferred. Also, whatever percentage you offer to one employee you have to offer to everyone. So this is really only ideal for solo-prenuers or small businesses.

Solo 401(k):

The solo 401(k) is tailored for self-employed individuals and offers unique benefits:

1. Roth Contribution Options: Unlike the SEP IRA, the Solo-k allows for Roth contributions, providing tax-free growth and withdrawals in retirement.

2. Higher Contribution Flexibility: You can contribute up to $23,000 as an employee and make additional employer contributions based on your business income.

3. Control and Diversification: Unlike a normal 401(k), with a Solo-k you have more control over investment choices.

4. Only Eligible for Business Owner & Spouse: You can only use a Solo-k for the business owner and spouse (if they work in the business). If there are more employees you aren't eligible.

Setting up a Solo-k involves more complexity and potentially higher costs compared to a SEP IRA. You have to pay someone to establish & maintain the plan annually. But, having the Roth contributions is a big plus.

Choosing the Right Option

When deciding between a SEP IRA and a Solo 401(k), consider your retirement goals, tax preferences, and business structure. If simplicity is your priority, the SEP IRA may be ideal. On the other hand, if you value Roth contributions the Solo-k could be a better fit.

Ultimately, both options offer valuable retirement savings opportunities for self-employed individuals and will help you save much more for retirement then just utilizing an IRA.

If you have questions or need personalized guidance on retirement planning for self-employment, feel free to reach out for a free consultation!