Flying Solo: Retirement Plans for the Self-Employed

If you operate your own small business or work solo from your home, you probably don’t have a benefits department or a retirement plan administrator in the next office. However, that doesn’t mean you can afford to put retirement planning on the back burner. In fact, setting retirement goals and creating a plan to meet them is probably more important because it's up to you to make it happen.

Here are some retirement saving options for self-employed individuals:

SIMPLE IRA

A SIMPLE IRA plan (Savings Incentive Match Plan for Employees) is a simplified individual retirement account that is easy to set up and administer, and can be funded by both employer and employee contributions. Designed for small businesses with less than 100 employees, a SIMPLE-IRA has an employer contribution of 2% of all eligible employees’ pay with an option for an employer match of participating employees’ contributions up to 3% of pay. The employee contribution limit is $13,500 for 2021 ($16,500 if age 50 or older).*

Advantages: Cost is low and there are generally no annual reporting requirements for the employer. Employees have the opportunity to make contributions.

Best suited for: Small-business owners with a limited budget for making contributions.

SEP-IRA

A Simplified Employee Pension plan (SEP-IRA) is another low-cost retirement saving option that’s easy to open and maintain. It differs from a SIMPLE-IRA in that the employer makes the entire contribution — employees are not allowed to contribute. Self-employed individuals working alone can also fund a SEP-IRA. The contribution limits for self-employed persons who contribute to a SEP-IRA is $58,000 in 2021 ($64,500 if age 50 or older).* The employer contribution limit is 25% of employees’ net income and the employer must contribute equally for all eligible employees. However, the business owner is not required to make a contribution each year.   

Advantages: Low setup and maintenance costs, and no annual reporting requirements.

Best suited for: Self-employed individuals and small-business owners who would like to contribute higher amounts than allowed in a SIMPLE-IRA.

Solo 401(k)

An individual 401(k) retirement account or solo 401(k) is similar to 401(k) plans offered at other companies. The primary difference is that a business qualified to open a solo 401(k) is limited to employing only its owners, their spouses and partners. There can be no other employees. A solo 401(k) is more complicated and costly to run than either a SIMPLE-IRA or a SEP-IRA, and annual reporting is required by the IRS. The business owner can make elective deferrals up to 100% of earned income up to the annual contribution limit of $19,500 in 2021 ($26,000 if age 50 or older), plus employer nonelective contributions up to 25% of compensation as defined by the plan.*

Advantages: Contribution flexibility and a profit-sharing component can be included.

Best suited for: A business run by one person and his or her spouse, or small partner-run companies with no additional employees.

Secure Your Retirement Future

As a self-employed individual or small-business owner, you have sole control over your business's financial direction. But you also have a responsibility to yourself to contribute as much as possible to your retirement savings in order to secure financial future. If you need help choosing a retirement plan to meet your needs, connect with your business banker at Amegy Bank about IRAs and other employer-sponsored retirement options. 

* Contribution limits subject to annual cost-of-living adjustments for future years.