Retirement Accounts for Self-Employed Individuals

Retirement and Self-Employment

A traditional retirement account is set up by a financial institution to help you start saving for retirement. This is usually set up when you get a job. However, if you are self-employed, you may be confused as to where to start to make a retirement account. Here are three different retirement accounts for self-employed individuals.

1. Simplified Employee Pension IRA

A simplified employee pension individual retirement account (SEP IRA) is a popular choice for individuals who are self-employed or those who own a small business with a few employees. It is similar to a traditional IRA in terms of structure and tax benefits. This IRA works well for those who want flexibility in how much and how often they can contribute to their account.

The primary advantage of a SEP IRA is that taxes on contributions are deferred. Those who participate in a SEP IRA do not pay taxes on their savings until they take their distributions. Like a traditional IRA, if you take distributions before age 59 ½, you may be subject to additional taxes and tax penalties. To participate in a SEP IRA, you must be 21 years old or older, you must have worked for the company for at least three of the last five years, and you must have received at least $600 in compensation from the business.

2. Simple IRA

A simple IRA works well for those who own a small business with fewer than 100 employees. This IRA is suited well for individuals who want to save for retirement and want to encourage their employees to participate as well. In a simple IRA, the employee owns their own account and they can add their own funds in addition to employer contributions. Each employee contribution is made with pre-tax dollars and no taxes are assessed until distributions are taken. However, the IRS places a limit on the amount an employee can contribute to their accounts.

3. Solo 401(k)

A solo 401(k) may be the best choice for those who are self-employed and have no employees. The program is designed to give those people some of the advantages that employees of larger organizations qualify for. Personal contributions to a solo 401(k) are tax-deferred, meaning deposits are made with pre-tax dollars. In addition, you will have no tax liability until you take a distribution. You can increase your savings by making additional contributions from your business. You can contribute up to 100% of any earned income, up to the IRS limit. Rules for withdrawing are the same that apply to a standard 401(k). Any distributions taken before age 59 ½ have a 10$ tax penalty in addition to whatever other taxes you owe.