What types of retirement accounts can you use (besides a Roth IRA)?
By Nikita Wolff
If you’re part of the 11% of adult workers in the US that are self-employed, you may be asking yourself how you can save for retirement (especially if you’ve already maxed your Roth IRA). The following accounts are those most commonly used by small business owners. Bear in mind that in the case of self-employment, you are both the “Employee” and the “Employer” (this will work in your favor!)
Over the years, contribution limits will adjust and you can always find the most comprehensive and up-to-date information here. However, as of January 2023, here are your options, along with the rules & limitations for each type of account:
Savings Incentive Match Plan for Employees (SIMPLE) IRA plans allow you to put all of your net earnings from self-employment into the plan: up to $15,500 in 2023, plus an additional $3,500 if you’re age 50 or older, plus either a 2% fixed contribution on the “employer” side or a 3% matching contribution.
- SIMPLE IRAs are easy to set up & inexpensive to run, especially compared to 401(k)s; plus there are fewer regulations.
- These plans offer instant vesting of employer contributions
- Employees get a tax and savings benefit
- Employers must provide a 100% match up to 3% of employee’s contributions or provide 2% of their annual salary (this is a potential downside for the business, but upside for the employees)
- If an employee participates in any other employer plan during the year, the elective salary reduction allowed between all plans combined is $22,500
- No Roth option
- Lower contribution limit
- Steep withdrawal penalties
401(k) plans allow you to make annual salary deferrals up to $22,500 in 2023, plus an additional $7,500 if you’re age 50 or older. If you’re electing into this plan as a self-employed person through your business, you can also contribute up to an additional 25% of your net earnings from self-employment (not to exceed a combined $66,000 in 2023).
- These plans can be Traditional or Roth (tax-advantaged either way!)
- Employer doesn’t have to contribute.
- The annual contribution limit between employee + employer is higher than other retirement plan options.
- Setting up a 401k requires a considerable degree of administrative resources if you are employing more than just yourself because of the need to undergo rigorous non-discrimination testing (to ensure that favor is not being given to highly compensated employees). If you are only employing yourself and a spouse, you are exempt from discrimination testing.
With a Simplified Employee Pension (SEP), you (as the “employer”) can contribute as much as 25% of your net earnings from self employment, up to $66,000 for 2023.
- Easy to set up & administer
- Can also personally contribute to an IRA or Roth IRA
- Contributions to SEP IRAs are tax deductible
- Only the employer can contribute
- This type of plan does not allow “catch-up” contributions for people 50 and older
- If you employ more than just yourself, employers have to contribute the same percentage to employees that they contribute to their own SEP IRA.
- No Roth option
For a nice side-by-side comparison, you can check out Vanguard’s small business retirement options resource here.
If you’re self-employed, we hope that at least one of these plans stuck out to you as a suitable retirement savings tool. While 3rd Decade’s #1 account recommendation is a Roth IRA, even with a contribution limit of $6,500 per year (as of 2023), this may not be sufficient to fully fund your retirement, so we recommend taking advantage of the accounts available to you to the fullest extent possible.