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Best Retirement Plans For Self-Employed Workers

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retirement plans for self employed

So many Americans today have opted out of working for other people to become self-employed. According to Bureau of Labor Statistics (BLS) data, more than 10 million Americans have described themselves as self-employed in 2022, and that’s where the big question comes in retirement plans for self-employed.

It is also important to know that being your own boss is not so easy because you have to plan everything yourself like your retirement, other than when you are working for an employer sponsoring a retirement plan on your behalf.

A retirement plan is very important to everybody, this helps you save up money for the future because obviously, you won’t work all your life. The earlier you begin the process of creating that life, the better.

Here are the details on some of the best retirement plans, to help you choose, and their importance

What Are Retirement Plans for the self-employed?

Self-employed retirement helps provide people who work for themselves with tax benefits which enables them to save and invest to support a comfortable standard of living after they retire

What are the best retirement plans for 2022 for self-employed individuals?

These plans provide tax advantages for contributions, but each has different rules, requirements, and contribution limits.

Read Also: Average Retirement Age in the United States

1. SOLO 401(k)s

A solo 401(k) is meant for businesses with no employees. Also known as a one-participant 401(k), there are no age or income restrictions for solo 401(k)s you are not allowed to have employees except your spouse.

  • Contribution limit: With a solo 401(k), you can make an employee contribution – up to $20,500 in 2022 – as well as an employer contribution up to 25 percent of your company’s profits, up to a total deposit of $61,000 between the two. Those aged 50 and older can add an additional $6,500 as a catch-up contribution.
  • Tax advantage: This plan works just like a standard, employer-offered 401(k): You make contributions pre-tax, and distributions after age 59½ are taxed
  • How to get started: You can open a solo 401(k) at many online brokers. You’ll need to file paperwork with the IRS each year once you have more than $250,000 in your account.
Pros
  • Like a SIMPLE plan, self-employed individuals may contribute to a Solo 401(k) both as an employer and employee
  • Individuals can also decide to make either tax-deductible deferrals or post-tax Roth deferrals, based on their needs.
Cons
  • These plans can be more complex to maintain, and investment options may be more limited than in IRAs.

2. SEP-IRAs

SEP-IRAs, or Simplified Employee Pension IRAs, offer a low administrative burden and high contribution limits. This is Best for self-employed people or small-business owners with no or few employees.

  • Contribution limit: The lesser of $61,000 in 2022 ($58,000 in 2021) or up to 25% of compensation or net self-employment earnings, with a $305,000 ($290,000 in 2021) limit on compensation that can be used to factor the contribution. Again, net self-employment income is net profit less than half of your self-employment taxes paid and your SEP contribution. No catch-up contribution.
  • Tax advantage: You can deduct the lesser of your contributions or 25% of net self-employment earnings or compensation — limited to that $305,000 cap per employee in 2022 — on your tax return. Distributions in retirement are taxed as income. There is no Roth version of a SEP IRA.
Pros
  • SEP IRAs are easy to open and simple to maintain
  • SEP contributions are tax deductible up to the maximum allowed per year
  • SEP IRAs are also non-exclusive with other IRA accounts, meaning you can still contribute to other IRAs up to the maximum contribution limits.
Cons
  • Because SEP IRA contribution limits depend on your annual income, the amount you can save for retirement each year could vary.
  • Individuals cannot remove money from SEP IRAs prior to 59 ½ without incurring a 10% penalty, with a few exceptions.

3. SIMPLE IRA

The SIMPLE IRA is an easy way for small employers, including the self-employed, to offer employees a retirement plan. The SIMPLE IRA can be easier for an employer to set up than many 401(k) plans with complex rules. Best for larger businesses, with up to 100 employees.

  • Contribution limit: Up to $14,000 in 2022 ($13,500 in 2021), plus catch-up contribution of $3,000 if 50 or older). If you also contribute to an employer plan, the total of all contributions can’t exceed $20,500 in 2022 ($19,500 in 2021).
  • Tax advantage: Contributions are deductible, but distributions in retirement are taxed. Contributions made to employee accounts are deductible as a business expense.
Pros
  • SIMPLE IRA are tax deductible, and the plans tend to be easy to maintain with relatively few fees.
Cons
  • You cannot contribute to a SIMPLE IRA if you have another retirement plan. Like other IRAs,
  • Withdrawing funds prior to retirement age will mean paying a penalty of 10%—and 25% within the first two years of participation in the plan.
  • You cannot rollover funds from SIMPLE IRA to another plan within the first two years of participation.

How to Choose the Best Self-Employed Retirement Plan for You

Choosing whether a specific self-employed retirement plan is right for you depends on a number of factors. Before you sign up for a plan, ask yourself the following questions:

  • How much do you want to save for retirement each year?
  • How much can you afford to save each year?
  • Do you plan on having employees in your business, other than your spouse? If so, how many?
  • How much time and money do you want to invest in administering your retirement plan?

Also Read: The 15 Best Books about Investment for Beginners

Why saving for retirement is difficult for the self-employed

Any self-employed person should remember these factors that stop him/her from saving for retirement:

  •       Expenses associated with running a business
  •       Getting rid of significant debts
  •       Inconsistent income
  •       The cost of health care
  •       Costs of education

Important to plan for retirement as a self-employed person

Here are some real benefits to saving for retirement now:

  1. You have the opportunity to plan for yourself, you can decide when to retire and decide on a retirement plan that is best for you.
  2. planning retirement as a self-employed person gives you the ability of financial discipline, in this case, you decide and what is necessary to run your business and how much it may cost in other to save up for retirement.
  3. You will enjoy a more blissful married life with your spouse not having much to worry about finances
  4. As a self-employed person, you can decide when to begin saving or planning for retirement. The earlier you start planning the better.
  5. Another great importance is better health due to lower levels of stress financial stress can cause physical conditions and illnesses such as depression and anxiety, but planning your retirement yourself can save you all of these illnesses because you got to do it your own way.

Considerations When Choosing a Retirement Plans For Self Employed

Before you select a retirement plan, think about the qualities that the plan should have to meet your needs. Here are some questions to ask about the plans you are considering:

  • What are the costs of the plan?
  • What are the tax benefits?
  • Does the plan require you to make contributions every year?
  • What is the deadline for establishing the plan? 

It is important to take note of these questions before making the move to choose any retirement plan and most of the requirements are usually different you might want to pay attention to that as well

Bottom Line

Choosing the right retirement plan for you requires thoughtful planning, it is important to know both the opportunities and risks that come with your retirement plans,

Its never too late to start planning for retirement you can start from little, the solo 401(k) is generally a great pick, especially for small business owners and freelancers

References:

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