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Retirement for self-employed people: What to know & where to start

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Maskot/Getty Images/Maskot

Millions of Americans are self-employed—16 million to be exact—working gigs and operating small businesses from rented offices, self-made storefronts and establishments, repurposed spaces in their homes, or even entirely on the go. And while being your own boss can be a thrilling and fulfilling career path, that doesn't mean you won't run into stressors. Selecting and maintaining a retirement plan, for example, becomes entirely your own responsibility. This can feel a bit daunting.

The good news is that plenty of options exist when it comes to retirement for self-employed people.

5 common retirement plans for the self-employed

Here is an overview of a five great retirement plans to choose from if you're self-employed. And, as the employer, you can deduct contributions to your employee's retirement accounts as a business expense.

1. Consider a Solo 401(k) if you are self-employed with no employees

Solo 401(k)s are limited to business owners with no employees with one exception. If you're married and you and your spouse both work for the business, then you both can contribute to the plan based upon each of your compensations. Contributions are tax-deferred, and there are no age or income restrictions.

A unique and appealing feature of a solo 401(k) is you can contribute to it twice, once as an employee and then as the business owner.

2023 solo 401(k) contribution limits

  • 2023 contribution limit: As an employee, your maximum contribution cannot exceed $22,500
  • 2023 catch-up limit for age 50 and older: $7,500
  • As a business owner, you also can contribute up to 25% of your compensation.
  • The total of all the contributions cannot exceed 100% of your compensation or $66,000; $73,500 if age 50+.
  • Special contribution/benefit calculation limits apply to non-W-2 self-employed owners.

Bottom line: Solo 401(k)s are a great option for a self-employed person with no employees who can afford to make significant contributions to their plan.

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2. Traditional 401(k)

If you've been employed at a job that offers a 401(k) option, you likely know the basics of how they work. You can contribute pretax dollars to it, and your investments may grow tax-deferred until you start taking withdrawals in retirement.

As an employer, you may choose to match employer contributions up to an annual maximum. Note that 401(k) plans require a fair degree of administrative resources.

401(k) eligibility requirements

A business of any size can offer 401(k) plans.

Employees must meet the following eligibility requirements, however you can choose to make the requirements less restrictive:

  • Age 21.
  • Must include employees who have 500 hours of service in 3 consecutive years or 1,000 hours of service in 1 year.

2023 401(k) contribution limits

  • 2023 contribution limit: $22,500
  • 2023 catch-up limit for age 50 and older: $7,500
  • As a business owner, you also can contribute up to 25% of each employee's compensation.
  • The total of all the contributions cannot exceed 100% of each employee's compensation or $66,000; $73,500 if age 50+.

Secure Act 2.0 & 401(k)s

Due to new changes enacted by the SECURE Act 2.0, there are a couple other things employers must keep in mind regarding traditional 401(k)s:

  • Employers are required to enroll employees in 401(k) plans automatically starting in 2025 (though some small businesses are exempt).
  • There are provisions within the act that allows employers to direct employee contributions to student loan payments.

The bottom line: A traditional 401(k) is the most traditional retirement savings plan option, but require more administrative resources.

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3. Simplified employee pension (SEP) IRA

A SEP IRA is a retirement savings plan for people who are self-employed with a few employees. It offers a flexible, convenient way for business owners to contribute to their employees’ retirement savings as well as their own.

A SEP is the only plan that allows you, until your tax filing deadline (plus extensions), to decide if you want to sponsor a SEP plan and make contributions to it. This makes a SEP an attractive option for businesses with variable cash flows.

SEP IRA eligibility requirements

If you elect to offer a SEP, all eligible employees must participate in the plan—including you as the owner. Employees choose where they establish their SEP IRA and how the employer contributions are invested.

Your employees must meet these eligibility requirements, however you can choose to make the requirements less restrictive:

  • All eligible employees age 21 or older must be included.
  • Have worked for you anytime in three of the last five years.
  • For 2023, earn a minimum annual compensation in year of contribution of $750. Limits are indexed.

2023 contribution rules & limits for SEP IRAs

  • Contributions are limited to the lesser of 25% of compensation, up to $66,000. Special contribution/benefit calculations apply for self-employed individuals.
  • No catch-up contributions are available with SEP IRAs.
  • You don't have to contribute to your SEP IRA plan each year. If, however, you do contribute to your plan and sponsor a SEP IRA for your employees, you must contribute the same percentage to their plans as you do your own.

Secure Act 2.0 & SEP IRAs

There is change to plan for due to the passage of the SECURE Act 2.0:

  • Roth SEP IRAs are now an option. These non-elective contributions are immediately vested. They are after-tax, included in the employee's annual taxable income and any earnings may grow tax-deferred.

Bottom line: SEP IRAs are a more attractive option for solo business owners or those with very few employees because matching contributions can add up.

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4. Savings incentive match plan for employees (SIMPLE) IRA

A SIMPLE IRA is another option that offers a flexible, convenient way for a business owner to contribute to both their own and employees' retirement savings. With a SIMPLE IRA plan, you make certain matching or non-elective contributions directly to each eligible employee’s SIMPLE IRA, including your own. Each employee will choose the investments for the contributions made into the SIMPLE IRA.

SIMPLE IRA eligibility requirements

You must have no more than 100 employees and don’t currently offer another retirement plan. All employees regardless of age must be included.

Your employees must meet these eligibility requirements, however you can choose to make the requirements less restrictive:

  • Received $5,000 in compensation in any two prior years and/or expect to receive $5,000 in compensation in the current year.

2023 SIMPLE IRA contribution limits

  • Annual contribution limit: $15,500.
  • Catch-up contributions are allowed for 50 and older of up to $3,500.
  • You are required to make contributions to employee accounts—either a $1 for $1 match capped at 3% of each participating employee's salary or a 2% flat fee to all employees' income, whether they contribute or not.

Secure Act 2.0 & SIMPLE IRAs

Some of the new changes with the SECURE Act 2.0 include:

  • Roth SIMPLE IRAs are now an option. Contributions are made after-tax and included in the employee's annual taxable income and any earnings may grow tax-deferred. The employer Roth match or nonelective contributions will be taxable to the employee in the year made.
  • Starting in 2024, small employers can make additional employer contributions (beyond the required match/nonelective) up to the lesser of $5,000 or 10% of compensation. It requires the employer to have fewer than 25 employees.
  • For employers with more than 26-100 employees, the employer is eligible for the larger employer contribution if they increase the match to 4% or the nonelective contribution to 3%.

Bottom line: A SIMPLE IRA is a good option for small businesses with multiple employees that don't want the administrative burden of a traditional 401(k).

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5. Traditional or Roth Individual Retirement Account (IRA)

An IRA is one of the easiest ways a self-employed individual can begin saving for retirement. There are limited eligibility requirements to open an account, and they are easy to open. Most financial service institutions offer these plans. However, something to keep in mind is that for many people who are self-employed, employer-sponsored retirement plans offer more flexibility in the total contribution amount, so those may be better options.

There are two types of IRAs to choose from:

Traditional IRA

With a traditional IRA, you make pre-tax contributions that are tax-deferred, meaning you will pay taxes later when you withdraw funds. Traditional IRAs also have a required minimum distribution (RMD) that would start between age 72 and age 75, depending on the year you were born.

Roth IRA

A Roth IRA allows you to make contributions with dollars you've already paid taxes on, so when you take out your money in retirement, it's tax-free.1 And, there is no RMD requirement for Roth IRAs.

However, Roth IRAs have income limits for eligibility. You may contribute to a Roth IRA if your monthly adjusted gross income (MAGI) for 2023 is less than $153,000 (single filer) or less than $228,000 (joint filer).

So, if you make too much, you may not be able to open an account.

2023 IRA contribution limits

The IRS sets contribution limits on IRA accounts that are the same for both traditional and Roth versions.

  • 2023 contribution limit: $6,500
  • 2023 catch-up limit: $1,000

Bottom line: IRAs might be a good option for a solo, self-employed business owner who wants to start saving but doesn't have a lot of cash on hand.

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Saving strategically for retirement

Regardless of what retirement plan you choose, a solid budget is the foundation of every retirement plan. Prioritize your future by paying yourself first, as they say, with a consistent line item in your budget for a retirement fund contribution. Intentionally carve out a piece of your monthly income or profit for retirement, and maintain that contribution as consistently as possible

Along with contributing as much and as frequently as you can, you also should safeguard your retirement savings. As a self-employed person, you should consider having a handful of other protections and services in place to ensure you don't force an early withdrawal or otherwise damage your nest egg:

  • Get business insurance. An accident in your workplace or a lawsuit could cause severe financial strain for your company (and potentially your savings). Business liability insurance can help protect you from costly settlements that you would otherwise be financially responsible for.
  • Consider a healthcare savings account (HSA). An HSA is a helpful tool if you have a high-deductible health plan. You might consider setting up an HSA to cover out-of-pocket healthcare expenses so you don't have to dip into your retirement savings if an unexpected health emergency arises.

Working with a financial advisor to walk through these important small business necessities—including a more in-depth look at retirement for self-employed individuals—can help you fully understand their impacts on your life, business, and future. Contact one of our financial advisors today to get started.

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Distributions of earnings are tax free as long as your Roth IRA is at least five years old and one of the following requirements is met: (1) you are at least age 59½; (2) you are disabled; (3) you are purchasing your first home ($10,000 lifetime maximum); or (4) the money is being paid to a beneficiary.

Thrivent and its financial advisors and professionals do not provide legal, accounting or tax advice. Consult your attorney or tax professional.