Retirement Plans for Self-Employed Individuals and Small Businesses

Posted on June 16, 2020 · Posted in Blogs, Retirement Planning

How do you choose a retirement plan? As a small business owner or self-employed individual, you may not realize how many outstanding options you have. Below, we’ll discuss a few retirement savings options, including one plan that may allow you to shelter your first $26,000 of income from taxes!

Should I Open an Individual 401(k)?

Individual 401(k)s are a perfect option if you are self-employed. These plans can only include you and your spouse. Individual 401(k)s allow you as a self-employed individual to contribute up to $57,000 (or $63,500 if over 50 years old) in 2020. This total is comprised of an employee contribution and employer contribution. The maximum employee contribution for 2020 is $19,500 for individuals under 50 and $26,000 for individuals over 50. The maximum employer contribution for 2020 is 20% of net self-employment income up to the total limit of $37,500. So, if you own a business with your spouse and are over 50, you may be able to shelter up to $127,000 of income from taxes!

Should I Open a SEP IRA?

SEP IRAs are an excellent option if you are self-employed or own a small businesses with few employees. SEP IRAs allow you to contribute the lesser of 25% of your employee’s compensation for the year or $57,000 as of 2020. Employees may not contribute to SEP IRAs.

Should I Open a SIMPLE IRA?

SIMPLE IRAs are fantastic for companies with less than 100 employees and no other employer-sponsored retirement plan in place.

SIMPLE IRAs are also comprised of an employee contribution and an employer contribution. The maximum employee contribution for 2020 is $13,500 for individuals under 50 and $16,500 for individuals over 50. The maximum employer contribution for 2020 is either a match of the employee’s SIMPLE contribution up to 3% of the employee’s compensation or a non-elective contribution to all eligible employees up to 2% of each employee’s compensation. For the non-elective contribution calculation, employee compensation is limited to $285,000.


What’s Next?

Are you trying to decide which plan is best for you? Let’s talk. Shoreline can help you set up the perfect retirement plan.

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