Self-employed have many of the same options to save for retirement on a tax-deferred basis as employees participating in company plans. The following information is from the IRS.
SIMPLIFIED EMPLOYEE PENSION (SEP)
- Contribute as much as 25% of your net earnings from self-employment (not including contributions for yourself), up to $58,000 for 2021.
Establish the plan with a simple one-page form:
- complete
- Form 5305-SEP, Simplified Employee Pension – Individual Retirement Accounts Contribution Agreement PDF, or
- an IRS-approved “prototype SEP plan” offered by many mutual funds, banks and other financial institutions, and by plan administration companies; and
- open a SEP-IRA through a bank or other financial institution.
Set up the SEP plan for a year as late as the due date (including extensions) of your income tax return for that year.
401(K) PLAN
- Make annual salary deferrals up to $19,500 in in 2021, plus an additional $6,500 in 2021 if you’re 50 or older either on a pre-tax basis or as designated Roth contributions.
- Contribute up to an additional 25% of your net earnings from self-employment for total contributions of $58,000 for 2021 ($57,000 (for 2020 and $56,000 for 2019), including salary deferrals.
- Tailor your plan to allow access to your account balance through loans and hardship distributions.
A one-participant 401(k) plan is sometimes referred to as a “solo-401(k),” “individual 401(k)” or “uni-401(k).” It is generally the same as other 401(k) plans, but because there are no employees who work for the business, it is exempt from discrimination testing.
SAVINGS INCENTIVE MATCH PLAN FOR EMPLOYEES (SIMPLE IRA PLAN)
You can put all your net earnings from self-employment in the plan: up to $13,500 in 2021 and in 2020 ($13,000 in 2019), plus an additional $3,000 if you’re 50 or older (in 2015 – 2021), plus either a 2% fixed contribution or a 3% matching contribution.
Establish the plan:
- complete
- Form 5305-SIMPLE, Savings Incentive Match Plan for Employees of Small Employers (SIMPLE) – for Use With a Designated Financial Institution PDF,
- Form 5304-SIMPLE, Savings Incentive Match Plan for Employees of Small Employers (SIMPLE) – Not for Use With a Designated Financial Institution PDF, or
- an IRS-approved “prototype SIMPLE IRA plan” offered by many mutual funds, banks and other financial institutions, and by plan administration companies; and
- open a SIMPLE IRA through a bank or another financial institution.
- Set up a SIMPLE IRA plan at any time January 1 through October 1. If you became self-employed after October 1, you can set up a SIMPLE IRA plan for the year as soon as administratively feasible after your business starts.
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