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Retirement Planning Options for The Self-Employed

| September 1st, 2021

There are many great things about being self-employed; you’re the boss, you have flexibility, and often more job satisfaction than those who work for someone else. There are downsides, too; the buck stops with you, you likely work more hours than if you worked for someone else, and you don’t have a pension or access to an employer-sponsored 401(k).

But that doesn’t mean you can’t have a great retirement full of confidence. We’ll take a look at retirement planning options for the self-employed.

Retirement Planning Options

Saving and investing aren’t enough when it comes to retirement planning. You need the tax benefits that investments specifically for retirement savings offer. The contribution limits here are for 2021. Sometimes the amounts increase.

Traditional or Roth IRA

Contribution Limits: $6,000, $7,000 for those aged 50 and over.

The contribution limits are low, so these accounts may only be a small part of your overall retirement plan, but these accounts are tax-advantaged. You can split contributions between a Traditional and Roth IRA, but the combined contributions can’t exceed the limits.

As long as you don’t have an employer-sponsored retirement plan, a Traditional IRA doesn’t have an income limit. However, traditional IRA contributions can’t be deducted if you participate in employer-sponsored retirement plan and your Modified Adjusted Gross Income (MAGI) is $76,000 or above for single filers and $125,00 for joint filers.

Of course, as is common for many IRS regulations, there is a work-around. If you want to contribute to a Roth but exceed the income limit, you can contribute to a Traditional IRA and convert it once a year to a Roth. This useful maneuver is known as a backdoor Roth.

Recommended for: Those with other fully-funded retirement accounts who want an account with additional tax benefits.


Contribution Limits: $13,500, $16,500 tax-deferred for those aged 50 and over.

SIMPLE IRAs live up to their name. The only paperwork required is the initial plan document and a yearly employee disclosure document. The plan is funded by employer contributions and elective pre-tax salary deferrals. Employers must match dollar-for-dollar contributions of up to 3% of an employee’s salary or make a non-elective contribution of 2% of an employee’s salary.

To participate, an employee must have earned at least $5,000 from the employer in any two prior years and expect to earn at least $5,000 during the current year.

Recommended for: Business owners with 100 employees or fewer.


Contribution Limits: $58,000 or 25% of net pay, whichever is less.

SEP IRAs don’t require a lot of paperwork or administration costs. Contributions are made by employers and must be made for all employees unless an employee makes under $650 per year. Contributions to the plan must be made no later than October 15 of the following year.

Recommended for: Business owners who are the sole employee or have only a few employees.

Individual or Solo 401(k)

Contribution Limits: $58,000, $64,500 for those aged 50 and over.

Employers can elect to make deferred contributions of up to $19,500 or $26,000 for those aged 50 and over. A self-employed person can make a non-elective contribution of 25% of net income up to $58,000 or $64,500, which includes the employee deferral amount if aged 50 or over.

If you work full-time for an employer that offers a retirement plan and have your own business, you can open an Individual 401(k), but the contribution limit is cumulative between the two plans. The combined maximum contributions to the employer’s retirement plan and the Individual 401(k) can’t exceed the $58,000/$64,000 limits.

Recommended for: A business owner who is the sole employee or the sole employee apart from their spouse.

Defined Benefit Plan

Contribution Limits: $100,000-$230,000 depending on your age and compensation history plus the 401(k) profit-sharing plan maximum of $58,000.

A defined benefit plan is complex and expensive to implement and should be handled by a financial professional. The contribution limits are complicated, based on a formula that takes into account age and compensation history.

After the plan is set up, the employer must make the minimum annual contribution as outlined in the plan’s documents. The plan requires full funding even in the event it’s frozen or terminated. If you have a bad year and cannot meet the required contribution, the IRS will hit you with an excise tax and interest accrues at the rate outlined in the original plan documents.

Recommended for: Those self-employed in a successful, established business who want to contribute at least $60,000 per year to a retirement account.

Which Plan is Right for You?

Owning a business means wearing a lot of hats. Being a financial advisor doesn’t have to be one of them! If you have questions about which retirement plan options are suitable for you, I’m here to help.

This information is not intended as authoritative guidance or tax or legal advice.  You should consult your attorney or tax advisor for guidance on your specific situation. In no way does advisor assure that, by using the information provided, plan sponsor will be in compliance with ERISA regulations.

Contributions to traditional, SIMPLE and SEP IRAs may be tax deductible in the contribution year, with current income tax due at withdrawal.  Withdrawals prior to age 591/2 may result in a 10% IRA penalty tax in addition to current income tax.

A ROTH IRA offers tax deferrals on any earnings in the account.  Qualified withdrawals of earnings from the account are tax-free.  Withdrawals of earnings prior to age 591/2 or prior to the account being open for 5 years, whichever is later, may result in a 10% IRA penalty tax.  Limitations and restrictions apply.

Contributions eligibility for ROTH IRAs are phased out for single filers in the income range (Modified Adjusted Gross income or MAGI) of $125,000-$140,000 and $198,000-$208,000 for joint filers.

IRA account holders have considerations to make before performing a ROTH IRA conversion.  The primarily include income tax consequences on the converted amount in the year of conversion, withdrawal limitations from a ROTH IRA, and income limitations for the future contributions to a ROTH IRA. In addition, if you are required to take a required minimum distribution (RMD) in the year you convert, you must do so before converting to a ROTH IRA.

Defined Benefit plans may be appropriate for businesses with consistent revenues for long-term funding where owners are older and warn more than the average employee.  These types of plans have additional costs and generally involve engagement of an actuarial firm for plan administration.