The Best Retirement Plans For Self-Employed Workers

Last Updated on 6th July 2022 by Jeffrey Camerda

Americans are enthusiastically participating in the Great Resignation, resigning from their employment in quest of greater compensation and a better work environment.

Self-employment is becoming more popular. More than 10 million Americans, the largest number in 13 years, said they were self-employed in 2022, according to the Bureau of Labor Statistics (BLS).

It’s hard to deny the allure of being your boss, but anybody thinking about going it alone should be aware of the financial implications.

A certified financial planner (CFP) who works with COUNTRY Financial says that “when you are self-employed, you no longer have the convenience and responsibility of having your employer sponsor a retirement plan on your behalf.”

Fortunately, you have a variety of retirement savings alternatives to choose from. We’ve weighed the benefits and drawbacks of the most popular self-employment retirement plans to make your decision easier.

The Best Self-Employed Retirement Plans of 2022

Individual Investment Accounts (IRAs)

An Individual Retirement Account (IRA) may be opened by anybody, whether or not they are self-employed. There are two types of individual retirement accounts: the Traditional IRA, which gives a tax advantage up front, and the Roth IRA, which delivers tax-free retirement income. If you contribute to an individual retirement account (IRA), the money you put into it does not count against your company expenses.

IRA contribution limits: Individuals may contribute up to $6,000 to an IRA in 2022, with an extra $1,000 in catch-up contributions for savers who are 50 or older.

IRA Pros: In general, setting up an individual retirement account (IRA) is not difficult, and IRAs provide a broad choice of investing alternatives. In addition to the various programs described below, anybody with a source of income may fund an IRA.

IRA drawbacks: IRA contribution limitations are lower than those for other self-employed retirement plans. If you and your spouse file jointly and are both enrolled in another retirement plan, you may have fewer tax deductions available to you. Income is also a limiting factor in Roth IRA eligibility. Traditional IRA withdrawals before the age of 59 are subject to a 10% penalty unless there are extenuating circumstances.

Simplified Employee Pension IRA (SEP IRA)

In comparison to traditional IRAs, the contribution limitations for the SEP IRA are substantially larger, making it a more attractive investment vehicle. A traditional IRA for self-employed persons is just as straightforward to set up and gives the same amount of flexibility.

SEP IRA contribution limits: In 2022, 25 percent of their adjusted net earnings, less one-half of the Social Security or Medicare taxes they pay, and the plan contributions you make for yourself, up to a maximum of $61,000.

Pros: Convenience and fantastic investing possibilities come included with SEP IRAs, which are available from many of the finest IRA service providers. To the extent authorized by law, contributions to SEPs may be deducted from an individual’s taxable income for the year in which they were made, up to and including any deadlines for filing a preceding year’s tax return that may have been extended. In addition, SEP IRAs are non-exclusive concerning contributions to other IRAs, so you may still make maximum IRA contributions.

Cons: Because SEP IRA contribution limitations are based on your yearly salary, you may not be able to save as much as you would want for your retirement each year. A 10% penalty applies to SEP IRAs if money is taken out earlier than age 59 unless a few exceptions are made.

Savings Incentive Match Plan for Employees (SIMPLE IRA)

Individuals and small-business owners with fewer than 100 workers are eligible to participate in the SIMPLE IRA. In comparison to a SEP IRA, the contribution limitations are larger.

Contributions: Personal contributions will be capped at $14,000 in 2022, with a catch-up contribution of $3,000 available to those 50 and older. In addition, employees may sponsor a matching contribution of up to three percent in the form of either a 2% fixed contribution or a 3% fixed contribution.

Pros: Simplicity and low costs are some of the advantages of SIMPLE IRAs, which are tax-deductible. Individuals who work as both an employee and an employer might benefit from these programs since they can save more money overall.

Cons: Contrary to popular belief, most people who have another retirement plan are not eligible to fund their SIMPLE IRA. There are a few exceptions to this rule. As with other IRAs, early withdrawals will incur a 10% penalty — and a 25% penalty during the first two years of membership. Within the first two years of membership, you also cannot transfer money from SIMPLE IRA to another plan.

Solo401 (k)

Unlike standard employer-sponsored 401(k) plans, the Solo 401(k) does not allow contributions from owners who have workers other than their spouses. As an “employer” and an “employee,” you have the opportunity to save more money.

Contribution: In 2022, self-employed persons may contribute up to $20,500 in wage deferrals, as well as an extra $6,500 for those aged 50 and over, as an employee. A self-employed person may additionally contribute up to 25% of his or her net earnings. Anyone under the age of 50 is limited to $61,000 in contributions in 2022.

Benefits: Self-employed persons may contribute to a Solo 401(k) as both an employer and an employee, similar to a SIMPLE plan, enabling them to save more for retirement overall. Tax-deductible deferrals and post-tax Roth deferrals are both options available to individuals, depending on their circumstances.

Cons: Limitations in investment alternatives and complexity of management are potential drawbacks of these plans, which are more complicated than traditional IRAs.

What Is a Self-Employed Retirement Plan?

To ensure a suitable level of living in retirement, self-employed retirement plans provide tax advantages to those who work for themselves.

If you’re self-employed, there are a few extra factors to consider before deciding on a retirement plan. Self-employed retirement plans, according to Rodney Deloe, CPA, chief operating officer of Straight Talk CPA, allow individuals to accumulate money while possibly decreasing their current tax obligations.

Finding the Right Self-Employed Pension Plan

Choosing the best self-employed retirement plan relies on a variety of criteria, including your financial situation. The following questions should be asked before signing up:

  • How much money do you want to put aside each year for your retirement?
  • Annually, how much money do you have to set aside?
  • If so, how many people will you have working for you? Are there any?
  • To what extent are you willing to devote the resources of time and money to managing your retirement plan?

Once you’ve figured out what you need and what you want, have a look at our tips below:

  • Traditional IRAs and Roth IRAs are the greatest options for self-employed persons with modest incomes.
  • SEP IRAs are best suited to self-employed persons who do not intend to hire anybody in the future and who wish to maximize their retirement contributions via contributions to their SEP IRAs. For those who don’t want to spend a lot of time and money establishing a strategy, “Deloe stated.”
  • In the case of self-employed persons without workers, Solo 401(k) plans are the greatest option for saving for retirement. A person who anticipates a considerable amount of self-employment income, wants to maximize their retirement contributions, wishes access to money if required without penalty if necessary, and is ready to expend more time and expenses to maintain the plan would be the best-case scenario, Deloe claims.
  • Individuals who want to hire more than a few more employees should use SIMPLE IRA plans.

The Bottom Line

No matter when you start saving for retirement, there’s a retirement account out there for you. According to Lorsbach, “the ideal strategy is to recognize both the possibilities and the hazards that come with your retirement planning. Consulting a financial adviser can help you choose investments within your plan that are appropriate for the risk tolerance you have. A tax expert may help you calculate the annual contributions and deductions you are eligible for, as well as any other tax consequences that may be relevant.

Jeffrey Camerda

Dr. Jeffery Camerda, PhD, is a financial planner who specializes in wealth management and retirement planning. With a PhD in Economics and Financial Planning, Jeffery represents the highest level of financial planning expertise and achievement in the USA In addition to preparing you for a career in financial planning, a PhD in economics and finance also prepares you for academic pursuits, such as becoming a university professor in teaching or doing research. Here at the Wealth Builder, our financial advisory company was founded in 2007 and services all across the USA with over 16 years of expertise. In order to provide the finest advice and services, we pay close attention to the specific financial circumstances and requirements of each client. In order to guarantee that our clients don't get a sales pitch for insurance or investments, as well as a lack of conflict of interest from a prospective commission-bearing corporations, Jeffery focuses on fee-based services. Financial planning for wealth managers, financial well-being workshops, and personal financial planning packages are all part of the company's offering. Jeffrey Camarda, PhD, CFA, EA is also the founder of the Family Wealth Education Institute, is a member of the Financial Planning Association and serves as the Chairman of Camarda Wealth Advisory Group

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