Retirement Planning Basics: Options for the Self-Employed and Small Business Owners

Retirement Planning Options for Entrepreneurs and Small Business Owners

Providing wealth management services to folks in Austin and Hill Country means that we work with a lot of entrepreneurs and small business owners. While it may be hard as an entrepreneur to think about life beyond your professional endeavors, it's still important to plan for retirement early so that when the time comes, you’re able to step away from your business and enjoy the profits of your life’s work.

We’ve talked about Roth and traditional IRAs and 401(k)s, but these retirement planning options are not always well-suited for the unique needs of the entrepreneurial individual. So, on behalf of Austin’s entrepreneurs and business owners, we thought we'd look at the retirement accounts that were created with you in mind.

SEP IRA

SEP and SIMPLE IRAs are great retirement account options for self-employed people (under sole proprietorships) and small business owners with few employees.

The primary benefit of a SEP IRA is for the employer (who can be a self-employed individual). These accounts have fewer administrative nuances than 401(k) plans, lower start-up costs, and are easy to set up through a broker. Contributions are tax-deductible and grow tax-deferred until distributions are made in retirement. There’s no Roth version of a SEP IRA—contributions are made pre-tax, and withdrawals are taxed as income.

Contributions are flexible and can go up to 25% of compensation or $61,000 annually for 2022 (whichever is less), offering a higher cap than traditional or Roth IRAs. However, employers must make proportional contributions for eligible employees if they contribute for themselves.

SIMPLE IRA

SIMPLE stands for Savings Incentive Match Plan for Employees. This plan is easy to set up and ideal for small business owners and self-employed individuals.

Like a traditional IRA, contributions are tax-deferred, and employees can have contributions deducted from their paycheck. Employers must match contributions up to 3% or make a 2% nonelective contribution whether the employee contributes or not.

In 2022, the contribution limit is $14,000 (or $17,000 for those 50 and older). Employees fully own employer contributions immediately, regardless of tenure, making this an attractive option for teams with high turnover or early-stage staff.

Solo 401(k)

Solo 401(k)s, also known as one-participant 401(k)s, are tailored for self-employed individuals with no employees. This includes freelancers, independent contractors, and sole proprietors. Spouses can also participate in the plan.

You can choose between traditional (pre-tax) and Roth (after-tax) solo 401(k)s. These plans allow for significant contributions: up to $61,000 in 2022 (plus a $6,500 catch-up contribution for those 50+), and contributions can be made both as the employee and employer.

Solo 401(k)s also allow loans, unlike IRAs. They require more paperwork than a SEP or SIMPLE IRA but offer unmatched flexibility and control.

For a detailed breakdown of contribution limits and calculations, consult the IRS guide for self-employed individuals.

You’ve Got Options

Self-employed individuals and small business owners deserve a happy retirement just like everyone else, and there are many options for entrepreneurial individuals to set themselves up for this security. Preparing for retirement often also involves combining IRA or 401(k) plans with an investment management strategy that will help sustain you throughout your retirement.

Connect with NEST’s resident mentor Gloria (who is also a small business owner herself!) and learn how a robust financial plan can help you prepare for retirement. Email Gloria at info@nestfinancial.net for a no-obligation consultation.

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DISCLAIMER: We are legally obligated to remind you that the information and opinions shared in this article are for educational purposes only and are not financial planning or investment advice. For guidance about your unique goals, drop us a line at info@nestfinancial.net.