6 Best Self-Employed Retirement Plans In 2023

These retirement plans offer tax benefits when you put money into them, but each one comes with its own set of rules, conditions, and limits. It’s crucial for self-employed individuals and those working in the gig economy to select the plan or plans that best match their needs and make sure they follow the IRS guidelines for contributions.

Alternatively, if you’re self-employed, you can also save for retirement by putting money into a taxable brokerage account. However, it’s important to note that these accounts don’t provide the same tax advantages as the retirement plans mentioned earlier.

SEP-IRAs

SEP-IRAs, also known as Simplified Employee Pension IRAs, are retirement plans that come with a few perks. They’re easy to manage, and you can put quite a bit of money into them. These days, they’ve become more popular than Keogh plans, which were common before 2001 but are now considered old-fashioned.

If you’re self-employed or a business owner, you can use SEP-IRAs to save for retirement. However, business owners must contribute for all their employees at a fixed percentage of their pay. You can contribute an amount that’s deductible, which is the lower of two options:

• 25% of your net self-employment earnings (that’s your profit after subtracting your SEP contribution and half of your self-employment taxes).
• The maximum contribution limit, which was $61,000 in 2022 and increased to $66,000 in 2023.

It’s important to note that SEP-IRAs don’t offer any extra catch-up contributions.

Solo 401(k)s

A Solo 401(k) is a retirement plan that’s similar to the ones employers provide. It allows you to save a lot of money for retirement, but there’s a bit of paperwork involved, and some brokerage firms might charge you fees for having one. Here’s the deal: if you have employees who are not your spouse, you can’t use this type of account. However, you get to choose between two flavors – a traditional 401(k) where you put in money before taxes, or a Roth IRA where you use after-tax dollars (but get tax-free withdrawals in retirement).

Now, about those contributions: you can put money into a Solo 401(k) as both the employee and the employer. In 2022, the total you can stash away is $61,000, and in 2023, it’s $67,000. If you’re 50 years old or older, you can add an extra $6,500 in 2022 or $7,500 in 2023 as a catch-up contribution, making it $67,500 in 2022 and $73,500 in 2023.

Here’s the breakdown:

• You can contribute up to $20,500 in 2022 or $22,500 in 2023 as an employee. If you’re catching up, that extra $6,500 or $7,500 goes into this part too.

• As the boss, you can put in up to 25% of your net self-employment earnings or the max limit, which is $61,000 in 2022 or $67,000 in 2023. To calculate your net self-employment earnings, you subtract your SEP contribution (excluding catch-up contributions) and half of your self-employment taxes from your net profit.

Oh, and if your spouse also works for the same business and earns income, you can make the same contributions for them as well.

SIMPLE IRAs

SIMPLE IRAs are a straightforward way to save for retirement. They come with minimal paperwork, allow you to put away more money compared to regular or Roth IRAs, and even let you save more for yourself than for your employees. If you’re a self-employed worker or have a business with up to 100 employees, you’re eligible for a SIMPLE IRA.

Now, let’s talk about contributions:

• Employees can contribute up to 100% of their salary or $15,500 in 2023 (in 2022, it was $14,000), whichever is less. And if you’re 50 or older, you can kick in an extra $3,500 in 2023 (up from $3,000 in 2022) as a catch-up contribution.

• Employers have a choice: they can either put in a fixed amount of 2% of each employee’s compensation (up to $330,000 in 2023, increased from $305,000 in 2022) or match up to 3% of each employee’s compensation.

Traditional or Roth IRAs

Traditional IRAs and Roth IRAs are open to more than just the self-employed. If you work independently or own a business, you can also use these retirement plans. Here’s how they work:

• Traditional IRAs let you put in money that you can deduct from your taxes, reducing what you owe the government.
• Roth IRAs take after-tax dollars, but the good news is that your money grows tax-free.

The paperwork involved is pretty minimal, and you’re contributing to these accounts as an individual, not as your own boss. There’s a combined contribution limit for both types – Traditional and Roth IRAs. In 2022, it’s $6,000, and in 2023, it increases to $6,500. If you’re 50 or older, you get a bonus. You can contribute an extra $1,000, making it $7,000 in 2022 and $7,500 in 2023.

However, there’s a catch: If you or your spouse can access another retirement plan through your workplace and you make too much money, there are some income limits to consider. If you earn more than those limits, you won’t be able to contribute to a Roth IRA at all, and you won’t get a tax deduction for your contributions to a traditional IRA.

Profit-Sharing Plans

Profit-sharing plans are a way for employees to get a piece of the company’s profits. This share can be based on how well the company does either every three months or once a year. Any business, no matter its size, can set up a profit-sharing plan, even if they already have other retirement plans in place. But here’s the catch: managing these plans can be quite a bit of work.

As the owner of a business, you get to decide whether you want to contribute to these profit-sharing plans for your employees. However, you can’t show favoritism by giving more to your high-earning employees. Often, these plans go hand in hand with 401(k) plans, but it’s usually the employers who put money into profit-sharing plans.

When you decide how much to put in, you can use a formula you create. Your contributions can’t go beyond a certain limit, and that limit is the lesser of two options:

• 25% of your employee’s compensation.
• $66,000 in 2023 (it was $61,000 in 2022). And if your employee is 50 or older, you can add an extra $6,500 in 2023 (it was $6,000 in 2022), making it a total of $73,500 in 2023 (or $67,500 in 2022).

Money Purchase Plans

Money purchase plans work a bit differently compared to profit-sharing plans. Here’s how:

1. Employers are required to contribute money for their employees in money purchase plans. The contributions don’t change from year to year based on how well the company is doing financially. You set a fixed contribution rate when you create this plan.

2. Setting up a money purchase plan can be a bit of a hassle because it involves a lot of administrative work. However, if you use a pre-approved plan, it might make the setup process a bit easier.

When it comes to contributions, as the employer, you can put in money, but there’s a limit. The most you can contribute is the lower of two options:

• 25% of your employee’s compensation.
• $66,000 in 2023 (or $61,000 in 2022) if your employee is under 50. But if your employee is 50 or older, they can add extra catch-up contributions, bumping up the limits to $73,500 in 2023 (or $67,500 in 2022).

Which self-employed retirement plan is best for you?

Wondering which self-employed retirement plan is the right fit for you? Well, it all depends on your specific needs. Here are some important things to think about:

• Do you want to contribute as both an employer and an employee, or just one of them?
• How much money are you planning to put into your retirement account?
• Do you have other people working for your business, and if you do, do you want to help them save for retirement too?
• Are you and your spouse both interested in making contributions to your retirement plans?
• Do you prefer to get a tax break when you put money in, or would you rather enjoy tax-free withdrawals in the future?
• How much administrative work are you willing to handle when setting up and managing your retirement plan?

Following chart will help you figure out which plan suits you best