Self-Employed? How to Choose the Right Retirement Plan for You

If you’re self-employed or own your own business, I’m betting your tax preparer already asked you about contributing to a retirement plan as a way to lower your taxable income. And, I’m also betting they recommended a SEP IRA (SEP stands for Simplified Employee Pension).

But the SEP does not offer the best options for all business owners. It’s just the most well-known. In fact, with another type of account, you might be able to save even more money or spend even less contributing to employee accounts.

So, how do you know if SEP is right for you?

Let’s dig in. Here’s an easy question: do you have employees?

Self-employed and you do have employees, then think about a SEP IRA, SIMPLE IRA or Traditional 401(k) plan:

  • You might choose a SIMPLE IRA if you want your employees to be able to contribute to their accounts and as the employer only be required to match their contributions up to 3% of their income. This option has the lowest contribution limit of the three types of plans at $12,500 in salary deferrals or $15,500 if age 50 or older.
  • You might choose a SEP IRA if you want to be able to contribute up to 25% of your compensation (net profit) to a maximum of $55,000 in 2018. However, you will also have to contribute the same percentage of their compensation (not yours) to each of your employees’ SEP IRAs as you do for yourself.
  • The Traditional 401(k) plan requires more work for you as the employer and can have significant annual administrative and testing costs. The contribution limits are $18,500 for 2018 or $24,500 if you are 50 or older.

Self-employed and you do not have employees, then you may want to consider a Solo 401(k) or SEP IRA:

  • You might choose a SEP IRA because you can contribute up to 25% of your compensation to a maximum of $55,000 in 2018. Since you don’t have any employees, you won’t have to contribute that percentage to anyone else. However, there is no “catch-up” provision for you with a SEP if you’re age 50 or older.
  • However, the Solo 401(k) is usually the better option because the amount you contribute isn’t based upon how much you make each year. For example, this year if you pay yourself $50,000 from your business, you can still put $18,500 into your Solo 401(k).  That’s far more than you would be able to put into a SEP. You may also add an employer match of up to 25% of your compensation, up to a total of $55,000. And if you’re over age 50, the total of your contributions in 2018 can be up to $61,500.

If you’re self-employed and ready to talk about retirement planning, the first step is connecting with our team at Hendershott Wealth Management. Click here to schedule an initial call.