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Finest retirement provision for the self-employed

Self employed retirement plans range from good to outrageously good and can allow you to save a lot more than you ever could with a traditional employer. A well-chosen retirement plan can enable entrepreneurs and the self-employed to finance a brilliant retirement.

The self-employed have several plan options, including defined contribution plans such as Solo 401 (k), SEP IRA, and SIMPLE IRA. But they also have some defined performance options.

Here are the details of some of the best retirement plans, how much you can save, and which plan is best for you.

Three popular plans for the self-employed

One of the disadvantages of self-employment is that you don’t automatically receive the perks that many employers offer, such as: But in some ways, self-employed retirement plans can go way beyond these regular options.

Here are three of the most popular defined contribution plans, and who they might be useful for.

only 401 (k)

The solo 401 (k) offers you all the advantages of a company 401 (k) plan and then offers you even more advantages. You can choose traditional or Roth 401 (k) options, which means you have the option of pre- or post-tax contributions. You can also invest in virtually any asset class. Choose a broker that offers a free Solo 401 (k) – including Fidelity and Schwab – and you won’t pay any additional fees.

With a Solo 401 (k), you can make an employee contribution – up to $ 19,500 in 2021 – and an employer contribution of up to 25 percent of your company’s profits, up to a total of $ 58,000 between the two. People 50 and older can add $ 6,500 as a catch-up fee.

As you can see, you can quickly go beyond where a company’s 401 (k) plan usually tops it off.

Who it is best for: One-person companies or those with one person and one spouse. May work well for those with a sideline (see below) as well as those making a lot of money.


A SEP IRA enables the self-employed to create a retirement plan for themselves as well as for employees. This type of plan offers a tax-deductible way to save – using the rules of a traditional IRA – but charges it with a maximum annual contribution limit of $ 58,000 in 2021. And using a SEP IRA doesn’t preclude you from getting a Traditional or Roth IRA ( what you really should be doing).

A SEP IRA enables the company to pay employer contributions to employees, including the self-employed. The company can contribute the lesser of 25 percent of its profits or the maximum annual amount. It’s also a widely used plan that many brokers offer access to. However, there is no Roth option and all employees must receive the same percentage contribution.

Who it is best for: Better for high-income self-employed, especially those in one-person outfits.


The SIMPLE IRA is a simple option for small employers, including the self-employed, to offer employees a pension plan. The SIMPLE IRA can be easier for an employer to set up than many 401 (k) plans that have complex rules. Employers with 100 or fewer employees who earn more than $ 5,000 can create one.

The SIMPLE IRA uses the rules of a traditional IRA, so it is tax-privileged and has the same payout requirements on retirement. Workers can have wages deducted from their paychecks and defer up to $ 13,500 annually, with a $ 3,000 catch-up contribution to those over the age of 50.

Employers are required to fund the account and they have several options: (1) You can match contributions up to 3 percent of the salary, or (2) You can collect up to 2 percent of an employee’s salary up to the annual compensation limit of. deposit $ 290,000 in 2021. Employees are fully earned once they receive the money, so every contribution goes to them immediately.

Who it is best for: Better for companies with at least a few employees and may allow companies to offer lower benefits than other plans.

Further opportunities for the self-employed

These three defined contribution plans are among the most popular, but the self-employed should also be aware that they can set up a defined benefit plan. A defined benefit plan can allow you to siphon off even larger amounts on a tax-deferred basis, but it is better suited to consistently higher earning individuals.

“These are worth considering if your self-employed income is significant,” said Dan Sudit, partner at Crewe Advisors in Salt Lake City. “The contribution limit is based on a variety of factors including age, income, and years of operation, but the annual benefit limit can exceed $ 200,000 per year.”

However, defined benefit plans can be more cumbersome to set up and more expensive to maintain. But if you contribute enough, the cost can be worth the tradeoff.

“In certain circumstances, this can be a powerful tool to put significantly more money into your retirement savings than the other standard qualifying retirement plans,” says Sudit.

For most people, a defined benefit plan isn’t really a worthwhile option, but it depends on your individual financial situation and, most importantly, your income.

Which pension plan for the self-employed is the best?

The right self-employed pension plan depends so much on your individual circumstances, but for those who are the only employee of the company (including a spouse), the Solo 401 (k) is a good choice. It gives you all of the benefits of a “normal” company sponsored 401 (k) plan and then breaks it down a few tiers.

Sudit recognizes the need to customize the plan to suit your personal circumstances, but says, “I have a preference for the Solo 401 (k) because it offers the best of all worlds and takes the greatest advantage of all of the other deferred retirement options above listed, with the option to choose what is best for you. “

He explains: “It enables the maximum contribution as an employee, the maximum combined employee-employer contribution, the Roth optionality and, in general, enormous flexibility and other significant advantages that enable the self-employed to maximize their pension contributions.”

Let’s unpack these benefits:

  • A Solo 401 (k) allows you to maximize the amount you put aside for retirement by adding both an employee and an employer contribution to the account.
  • You can access a Roth 401 (k) and take advantage of the attractive tax-free growth of this plan.
  • Depending on the broker or sponsor, you can invest in a variety of asset classes, which gives you maximum flexibility.
  • A spouse can also join the program, and that is the only exception to the “one-man” rule for the Solo 401 (k).

A Solo 401 (k) can be better than a SEP IRA

The Solo 401 (k) even has another more subtle perk that can make it a better choice than the SEP IRA for low paid or those using their business as a side job.

With the solo 401 (k) you can pay in up to 100 percent of your salary up to the employee’s annual maximum. In other words, in 2021, the first $ 19,500 you make can be put into the Solo 401 (k), saving you taxes. In contrast, the SEP IRA allows you to contribute 25 percent, so you would have to earn significantly more to achieve the same contribution level.

In addition to this benefit, you can also maximize the employer’s contribution with the solo 401 (k). Once you have reached the maximum number of employees, you can still contribute 25 percent of the remaining profits of your company. In contrast to the SEP IRA, you can still pay more into your retirement provision with a lower income, all other things being equal.

These are some of the biggest differences between the Solo 401 (k) and SEP IRA, but it can be useful to understand the full range of differences between the two popular programs.

The annual maximum of 401 (k) is limited

It’s worth noting that the maximum annual contribution is capped for all 401 (k) plans, and you are not allowed to put the maximum annual amount on your main job and then remove another maximum annual amount from your part-time job. So you will get $ 19,500 (in 2021) for all of your 401 (k) plans.

That said, if you maximize your employee contribution to your main job, you can still make an employer contribution equal to 25 percent of your company’s income with a Solo 401 (k). So it’s a completely legal way to save even more with the power of a Solo 401 (k).

This self-employed pension calculator can help you figure out which plan is best for you.

IRAs are still an option for the self-employed

Even if you are a self-employed person enrolled in a retirement plan – including the SEP IRA or SIMPLE IRA – you still have the option of enrolling in a traditional IRA or a Roth IRA.

This allows you to maximize your contributions in any of the above pension plans and still get the most out of your personal IRA. For 2021, that means you can deposit up to $ 6,000 each year (plus $ 1,000 if you’re over 50).

You enjoy all the benefits of an IRA, including tax deferred growth, and can take advantage of what many experts consider to be the best retirement account – the Roth IRA.

Bottom line

Which retirement plan is best for you depends on your situation. While the Solo 401 (k) is generally a good choice, it is a non-starter if you are more preoccupied than you and your spouse. To choose the right plan, you should carefully weigh your needs and the development of your business.

“Choosing the right strategy requires careful planning because if you rush yourself or become convinced of a strategy instead of carefully considering your needs and circumstances, you may feel too short and poorly prepared for your retirement,” says Sudit.

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