Self-employed? Know Your Retirement Savings Options!
- Michael Schreiber
- Mar 18, 2021
- 3 min read
For the second year in a row, the IRS has extended the tax filing deadline. Payment of 2020 federal income taxes can be delayed to May 17th without penalties or interest. This delay also applies to people who pay self-employment taxes.
It is important to note that this extension does not apply to estimated tax payments, and these payments are still due on April 15th. Many states are likely to extend their tax filing deadlines as well, and we encourage you to check with your state’s tax agency to learn about state extensions. Do you run your own business and seek to maximize saving for your retirement? Self-employed individuals have plenty of easy and cost-effective options when it comes to saving and investing for the long-term. Below are three retirement plan options that are popular with our clients. Please contact the Aevitas team if you have any interest in opening a plan. Please note that all contribution limits listed are for the 2021 tax year.
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SEP IRA
A simplified employee pension (SEP) IRA is similar to a profit-sharing plan and can be set up by sole proprietors, partnerships, and corporations. Only the employer contributes to the account, and the total contribution cannot exceed the lesser of 25% of annual compensation (compensation up to $290,000) or $58,000. Many business owners utilize the SEP IRA since the plan is easy to set-up, and there is no requirement to make a tax filing. A detail to be aware of is that you are required to contribute the same percentage to your other eligible employees as you do your own account.
SOLO 401(k)
Business owners that do not have any full-time employees, excluding business partners and spouses, qualify for a Solo 401(k). Similar to a regular employer-sponsored 401(k), a Solo 401(k) has an employee and employer deferral component. You can contribute as both parties, allowing a total contribution up to the maximum limit of $58,000 ($64,500 if age 50+). Depending on your age and business’s net earnings, your total contribution may amount more to a Solo 401(k) versus a SEP IRA. You can also designate your plan as a Roth. One disadvantage is that you will have to file a 5500 with the IRS if your 401(k) year-end balance is $250,000 or above.
SIMPLE IRA
A SIMPLE IRA (Savings Incentive Match Plan for Employees Individual Retirement Account) is an excellent starter plan if you have 100 or fewer employees and are looking to encourage your employees to make their own deferrals. In order to be eligible, employees must have earned at least $5,000 during any two prior years and are expected to earn at least $5,000 in the current year. The maximum annual contribution for employees is $13,500 ($16,500 if age 50+). Unlike a SEP IRA or Solo 401(k), employers are required to contribute either 1.) a match of employee contributions up to 3% of employee’s compensation, or 2.) 2% of each employee’s compensation (compensation up to $290,000). Creating a retirement strategy is especially important when you are self-employed because you do not have a company-sponsored plan that you can automatically enroll in. When you work for yourself, saving for retirement is entirely your decision to make. The good news is that a SEP IRA, Solo 401(k), and SIMPLE IRA make it possible to save and invest for your future while also giving you a tax break by deferring your income. Each type of plan is right for different people, and it is important to contact Aevitas to discuss which plan will best meet your business needs and retirement goals.
Contact Aevitas to talk more about how we can help you to plan for retirement and financial independence.
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