401k Plans / Retirement Planning

Best Retirement Plans for the Self-Employed

Published by Bob Gustafson

Best Retirement Plans for the Self-Employed

Retirement planning is a crucial aspect of securing your financial future, especially if you’re self-employed. Unlike employees who may have employer-sponsored retirement plans, self-employed individuals need to take proactive steps to create their own retirement nest egg. Fortunately, there are some excellent retirement plan options tailored to the needs of self-employed individuals.

Before we jump into the best retirement plans for the self-employed, let’s get on the same page about what we mean by “self-employed.” For the purposes of this post, we’re going to assume you’re either self-employed with no other employees (not including a spouse) or you run a small-sized company with only a few employees. For these scenarios, there are two good options. A Single 401(k) plan or a simple IRA. Now, let’s take a look at both of these options.

Note: If you are a high income earner, there are other options that can be considered along with these plans but they are beyond the scope of this blog.

Single 401(k) Plan

For the situation where you’re self-employed with no other employees except for a maybe a spouse, the single 401(k) plan would work best. Why? Like traditional 401(k) plans, you can put the standard limit in the salary deferral portion. But there’s also a profit-sharing part of the plan you can take advantage of. And finally, there aren’t any administration fees associated with this type of 401(k) .

A good example of when to use a single 401(k) plan is the following. Let’s say you’re a psychologist and you open a private practice. You know you won’t be hiring any other employees because you want to remain on your own. Setting up a single 401(k) plan for yourself is a great option for you.

Simple IRA

Once you hire additional employees, the single 401(k) plan isn’t an option. That’s when the simple IRA comes into play. You and your employees can put a specific amount of money from your individual earnings into the plan. But as the employer, you must match what your employees are putting into their plan. The match can be up to three percent of the employee’s salary. Similar to the single 401(k) plan, the simple IRA doesn’t have administrative fees. But unlike the traditional 401(k) plan, the simple IRA is relatively easy and inexpensive to set up.

Unfortunately, there are some people out there who convince small business owners to set up the traditional 401(k) plan for their company when it’s not needed (watch out for payroll companies). It’s very expensive to do so. And with the Simple IRA option available, it may not be necessary. However, as always, it’s important to consider your personal situation.

When to use a regular 401(k) plan?

A good example of when a regular 401(k) plan would work is with a small law firm with a handful of high earning employees. Why? Because the amount the high-income earners can put into their retirement plan is more with the traditional 401(k) plan versus the simple IRA.

On the flip side, take a small business with more than a dozen employees who aren’t high earners. Because they aren’t earning as much the simple IRA may be the best option.

Which is the best retirement plan for you?

Selecting the right retirement plan as a self-employed individual depends on your financial goals, income, and long-term plans. Each plan comes with its own benefits and considerations, so it’s recommended to contact an expert who will consider your personal situation and help find the best option for you!

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