Plan options for the self-employed
I am often asked about the best retirement plans out there for the self-employed. The “starter” plan is usually an Individual Retirement Account. But there are other options to consider:
Simplified Employee Pension (SEP-IRA): Geared toward those who have up to 25 employees and want to offer a retirement benefit that is easy to operate.
Contribution Limit: The lesser of: 25% of your net earnings from self-employment (net profit less half of your self-employment taxes paid and your SEP contribution), up to $56,000 for 2019, with a $280,000 limit on compensation.
Tax Deductibility: To qualify, complete IRS Form 5305-SEP, or an IRS-approved “prototype
SEP plan,” offered by many financial institutions and by plan administration companies.
Contribution Deadline: You can establish and fund the SEP plan as late as the due date (including extensions) of your income tax return for that year.
Pros: Available to any size business; low cost; no filing
requirement for the employer; and open to all eligible employees.
Cons: Only the employer contributes, so the burden is on your shoulders alone; contribution percentages must be equal to the ones you make for yourself, which can add up. There is no Roth version of a SEP IRA. Savings Incentive Match Plan for Employees (SIMPLE IRA Plan): Best for those with up to 100 employees.
Contribution Limit: Net earnings from self-employment up to $13,000 in 2019, plus an additional $3,000 if you’re 50 or older. There is also an employer contribution of either a 2% fixed or a 3% matching. The compensation limit for factoring contributions is $280,000 in 2019.
Tax Deductibility: Establish the plan by completing Form 5305-SIMPLE, Form 5304SIMPLE, or an IRS-approved “prototype SIMPLE IRA plan” offered by many financial institutions and by plan administration companies. Contributions made to employee accounts are deductible as a business expense.
Contribution Deadline: You can establish a SIMPLE IRA plan at any time January 1 through Oct. 1. If you became self-employed after Oct. 1, you can set up a SIMPLE IRA plan for the year as soon as administratively feasible after your business starts.
Pros: Employees can contribute through salary deferral; less
paperwork and testing than a standard 401(k).
Cons: Employers are required to make contributions; there is an early withdrawal penalty of 25% if participants withdraw within the first two years of participation in a SIMPLE IRA. Solo 401(k) plan: Geared to those who have no employees (other than a spouse) and have the capacity to sock away a lot of dough.
Contribution Limit: Salary deferrals up to $19,000 in 2019, plus an additional $6,000 if you’re 50 or older, either on a pre-tax basis or as designated Roth contributions. You can add another 25% of your net earnings from self-employment for total contributions of $56,000 for 2019. The limit on compensation that can be used to factor your contribution is $280,000 in 2019.
Contribution Deadline: Plan must be established before calendar year end and funding allowed up to tax filing deadline (including extensions).
Pros: You may be able to put more money into a 401(k) than a SEP due to the way the contribution levels are calculated.
Cons: More paperwork than a SEP.