Retirement Planning for the Self-Employed: SDIRAs & Solo 401k

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Self-employment can be a wonderful thing, especially if you like having a flexible schedule. But retirement planning for self-employed individuals can bring on some challenges. Finding a retirement account that suits the needs of your small business is one of those. However, don’t be discouraged, you have options.

We will be reviewing a few plans as potential options. You can determine which one will best help you achieve your retirement goals.

Why Save for Retirement If You’re Self-Employed?

Whether it’s in the vague distance or approaching soon, retirement looms ahead on the horizon — even for the self-employed. You must be prepared.

Small business owners should save for retirement. This not only prepares them for the future, but it can also lower their taxable income. This is an added benefit. Contributions to plans can be tax-deductible to the business as well as the individual depending on the plan— so, take the write off.

Business owners, entrepreneurs, independent contractors, or any self-employed person can support a prosperous retirement with the help of a diversified retirement strategy. Let’s look over some of the top retirement plans' specifics and which plan may be the most suitable for you.

Retirement Plans for the Self-Employed

Individual circumstances determine which self-employed retirement plan is right for you. Tax deferrals, matching contributions, and access to unique investment opportunities are just a few perks of different retirement accounts. For those who are the company’s sole employee, a Solo 401(k) could be a great option but has certain employee limitations.

There are IRA types that were created specifically for small businesses. These are Simplified Employee Pension (SEP IRA) and Savings Incentive Match Plan for Employees (SIMPLE IRA.) You can read about these plans here: Small Business Plans for Business Owners.

Although not specifically for self-employed individuals, Traditional and Roth IRAs can complement small business IRAs or Solo 401(k) to maximize savings. Depending on the IRA type, tax-deferred growth may be available, but investors should be aware of the contribution limits. Consider your needs and circumstances.

Don’t rush or become blindsided in choosing a strategy without doing your due diligence. Before taking the plunge, get to know the ins and outs of what each self-employed retirement plan has to offer to strategically build wealth for a lustrous retirement. For now, let's focus on IRAs and Solo 401(k) Plans.

Solo 401(k)

Solo 401(k)s are available to cover a business owner with no employees. Spouses that work for the business are an exception to this rule and offer the chance to increase your savings.

One tax advantage of Solo 401(k)s is that you can make pre-tax contributions. Then, once you’ve reached age 59½ and are ready to start making withdrawals, the distributions received are taxed as ordinary income.

As of 2022, contributions can be made up to $61,000. In 2023, that limit will be $66,000. Catch-up contributions are also possible for those aged 50 or over and capped at $6,500 as of 2022 and $7,500 in 2023.

This account type allows you to make contributions as an employer and employee. In this case you are both the employer and an eligible employee.

Your role as an employee allows you to make contributions to the account as you would to a standard employer sponsored 401(k). Elective deferrals can be 100% of compensation up to the annual limit of $20,500 in 2022 and $22,500 in 2023. Add in the catch-up contribution if desired and eligible and you can sock away a good bit of savings that will grow over time.

Your role as an employer permits you to make an additional contribution of up to 25% of the compensation. Sole proprietors and single-member LLCs are also able to contribute 25% of their net self-employment income (net self-employment income = gross income derived from your business - your ordinary and necessary business expenses). The maximum compensation limit for determining employer profit-sharing contributions was increased from $305,500 in 2022 to $330,000 in 2023.

Remember that the contribution restrictions apply per person, not per plan, so if you or your spouse also have outside work that provides a 401(k), the limits apply to both plans combined.


Individual Retirement Accounts (IRAs) Contributions

IRAs do not have tedious filing requirements and are easy to maintain. For SIMPLE IRAs there are no employee restrictions impeding your ability to open an account. You can even roll your previous 401(k) into an IRA if you’re leaving another job to start your business.

Both account types are tax-advantaged. Traditional IRAs qualify for tax deductions on contributions. With a Roth IRA, there is no immediate tax deduction. However, Roth IRA withdrawals are tax-free once the account holder has reached the eligible retirement age (59 and ½) and the account has been established for at least five years.

IRA contribution limits as of 2022 are as follows: $6,000 or $7,000 for those who are age 50 or older. For 2023, the contribution limit increased to $6,500 or $7,500 for those who are age 50 or older.

Note that single filers for a Roth IRA cannot earn above a certain income to be eligible to make contributions to their account. The Modified Adjusted Gross Income (MAGI) cannot exceed $144,000 to contribute to a Roth IRA. Joint filers cannot exceed a MAGI of $214,000 for 2022 ($153,000 and $228,000 respectively for 2023).

In addition to the age requirement, to reap the tax-free benefits on your earnings, you must have held the Roth IRA for 5 years before withdrawals of the earnings are permitted. If the age limit or time limit is not met, a 10% penalty fee may be applied. A penalty may also occur if contribution limits are exceeded, so be sure to keep track of how much you’re putting into your IRA.

Depending on the account type, tax-deferred growth may be available, but investors should be aware of the contribution limits. Consider your needs and circumstances.

Real Estate Investing in an IRA or Solo 401 (k)

Self-employment gives business owners the freedom and responsibility to choose their destinies. The same can be said for self-directed retirement plans, they give you the option to invest in many asset types including real estate.

As of 2022, returns on different types of real estate hover between 9-11%. Real estate offers potential to secure a financially free retirement, regardless of whether it is foreign or domestic, commercial or residential.

There are lots of possibilities to leverage this asset. You can invest in real estate using a Solo 401(k) or IRA retirement account. These accounts are also known as Real Estate IRAs.

In these accounts you are the executive decision-maker. So, it’s good to familiarize yourself with IRA real estate rules to avoid triggering any penalties. You can check out our step-by-step guide on IRA transfers for more insight


Let IRAR Help You Help You With the Best Option

Sometimes it helps to have an expert help you weigh the pros and cons of which retirement account best suits your retirement needs. For over 25 years, IRAR has helped investors make savvy decisions to plan for a fruitful retirement. We support investors by empowering them to build wealth through alternative investments and lowered fees.

For any self-employed person, the time is now. Call us at 888-322-6534 or contact us for a free consultation to find out more about which retirement plan will help you navigate towards a retirement vista of wealth and relaxation. 

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