Retirement Plan Options for Solo Entrepreneurs

You’ve started a business on your own and you’ve finally gotten it to the point where you have some money coming in. The real question now is what to do with it? What are the retirement options for those entrepreneurs that have decided to build a business for themselves and by themselves? You don’t have a company sponsored retirement plan with a match like your friends in the corporate world, but you do have more control of your options. Let’s take a look a variety of retirement plan choices for the 1099 contractor or the solo entrepreneur.

Individual Retirement Accounts (IRAs)

Individual Retirement Accounts (IRAs) are very simple to set up and allow for a variety of investment selections. As long as your income is below the Roth IRA exemption, you can establish a Roth IRA. Unfortunately, IRAs have a relatively low contribution limit of $5,500 (2017). IRAs may be a better fit for those entrepreneurs that are just starting out and want to start saving some money.

Simplified Employer Pensions (SEPs)

A SEP IRA, is a retirement plan where the contributions to the retirement plan are made by the employer. Since you’re a solo operation, guess what? You are the employer. With a SEP plan, you can contribute the lesser of 25% of the employee’s salary (Which would also be you) or $54,000 for the 2017 tax year.Contributions can be deducted as a business expense.

SEPs are a good fit for solo entrepreneurs that want minimal plan administration with the ability to contribute more than IRAs will allow. Contributions are flexible as well and can be made up until the tax filing date for the prior year. For example, you can contribute more to the SEP IRA in March of 2017 for the 2016 tax year. SEP IRAs do not have a Roth option.

Solo 401k

A 401k plan isn’t just for large companies will a multitude of employees. Solo 401k plans can be set up for solo entrepreneurs as another vehicle to save for re retirement. Contributions in a Solo 401k can be made in two capacities; one as the owner/employer and one as the employee even though they are the same person. As the employee, you can contribute up to $18,000 (2017) or up to $24,000 if you are over the age of 50. The employer can also make non-elective contributions up to 25% of compensation. The overall maximum contribution limits are $54,000 for a Solo 401k (2017 limits). For example, if Jim has a W-2 salary of $50,000, he can contribute the maximum of $18,000 as the employee. He can then contribute another $12,500 as the employer (25% of salary) for a total of $30,500.

Solo 401k plans may make sense for solo entrepreneurs that are interested in contributing more than a traditional IRA. Since contributions are coming you as both the employer and employee, a lower revenue business owner would have the ability to contribute more in a Solo 401k plan compared to a SEP. A solo 401k plan has a Roth option.

Solo 401k plans will have a greater administrative burden.  A 5500 filing form will have to be filed with IRS when the assets in the plan reach $250,000.