Retirement Plans for the Self-Employed

If you’re self employed, retirement planning can be confusing. There are three common retirement plans available for self-employed individuals:

Solo 401(k)

Solo 401(k)s are only available to a self-employed individual with no employees (except a spouse).  Individuals can contribute up to $54,000 per year as of 2017 ($60,000, if age 50 or older).  The contributions consist of employee contributions, $18,000 ($24,000, if age 50 or older), which can be deposited into a Traditional pre-tax Solo 401(k) or a Roth Solo 401(k).  The balance of the contribution is made as an employer contribution to get up to overall limit of $54,000.

SEP IRA

SEP IRAs are typically used by self-employed people who have no or few employees.  Individuals can contribute up to $54,000 in 2017 or up to 25% of compensation whichever is less.  Contributions are made on a pre-tax basis. There is no Roth option available. Individuals with employees must contribute an equal % of compensation to each employee.  This means if you contribute 15% of your compensation to a SEP IRA, you must contribute 15% of your employees’ compensation to their SEP IRAs.

SIMPLE IRA

SIMPLE IRAs are most appropriate for small to mid-size businesses with fewer than 100 employees. Employees can contribute up to $12,500 in 2017 ($15,500, if age 50 or older).  Employers are required to make contributions to all eligible employees using one of two formulas:  1. A dollar-for-dollar matching contribution of up to 3% of employee compensation, or 2. A 2% contribution to all eligible employees regardless of employee contribution level.  All contribution are traditional pre-tax contributions.

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