Options for Self-Employed Retirement Plans

The Census Bureau says that 67% of all U.S. businesses are one-person, self-employed entities. And as the gig economy continues, chances are good that number will go higher. So if you’re a sole proprietor with no employees, you need to listen carefully. Here are some options for saving for retirement and how they work.

A simplified employee pension, or SEP IRA, can work well for self-employed business owners with no employees. It’s got low start-up and operating costs, and you can even wait to set it up until the time you file your taxes—so you could still potentially fund a SEP right now for 2018 if you’re on an extension. You can put away as much as $56,000 this year, or up to roughly 20% of net self-employment earnings with a $280,000 compensation limit.

A SEP IRA may be better if you’re a one-person show and plan to keep it that way, but if you do have employees, you’ll eventually have to make contributions for them.

A Solo 401(k) works for your small business the same as it would if you were working for a big corporation. It’s just a 401(k) that you set up for yourself. So for 2019, you can contribute as much as $19,000 for elective deferrals and another $6,000 if you’re age 50 or older. With the Solo 401(k), you can also make what are known as profit-sharing contributions, which this year you can combine with the elective deferrals to a maximum of $56,000 plus any catch-up contributions. A Solo 401(k) can be really attractive to those who want to save a bunch for retirement but also want the flexibility to save less during years when business is not so good.

You’ve heard of a pension, right? That’s exactly what a defined benefit plan is. If you’re self-employed, you can set up your own pension designed to give you a steady stream of income at retirement. These can work very well for people with high incomes who want to save a lot for retirement on an ongoing basis. That’s a big upside—being able to save a lot. The downside is that defined benefit plans are expensive when compared to SEPs and IRAs, and they require annual administrative work. You also have to commit to funding a certain amount each year. So if you go this route, make sure that you follow all the rules.

Sole proprietors have many advantages over those with employees to take care of. You need to know all your options, and this is just one of the many ways that we here at Lucia Capital Group can help you out. Give us a call!