What to know about retirement if you're self-employed
Roughly 10 million people in the U.S. are self-employed, according to the Bureau of Labor Statistics.1 And while being your own boss can be fulfilling and lucrative, there's one perk of working for someone else that many self-employed people miss: having an employer-sponsored retirement plan.
The good news is that there are several retirement-saving options for self-employed people. Here's an overview of those options.
Traditional or Roth IRA
An individual retirement account (IRA) allows taxpayers with earned income (whether from self-employment or not) to save for retirement with tax-deferred or tax-free growth. There are two types of IRAs, each with different advantages.
- Traditional IRA. Contributions to a Traditional IRA are tax-deductible, and earnings in the account grow on a tax-deferred basis until withdrawn in retirement.
- Roth IRA. Contributions to a Roth IRA aren't tax-deductible, but earnings in the account are tax-free, and withdrawals are tax-free after age 59½ and the five-year rule has been met.2 (The five-year period begins the first tax year a contribution was made to your Roth IRA.)
For tax year 2022, the combined maximum contribution to a Traditional or Roth IRA is $6,0003 ($7,000 for individuals aged 50 or older). The deadline for making contributions is the tax filing deadline, not including extensions, meaning contributions for the 2022 tax year can be made up to April 17, 2023.
Traditional and Roth IRAs are good for self-employed people with no employees who want to start saving for retirement.
Self-Employed Retirement Options
While self-employed people don't get access to employer-based retirement plans, there are three other retirement options (in addition to Traditional and Roth IRAs) to consider.
A simplified employee pension (SEP) IRA is a retirement plan for both solopreneurs and businesses with few employees.
While there's no set limit to the number of employees that can participate in a SEP IRA, it's usually best for companies with very few employees because business owners must contribute equally to their own SEP IRA and those of their eligible employees.
The employer funds contributions to the plan.
For tax year 2022, the maximum contribution to a SEP IRA4 is the lesser of:
- 25% of net earnings from self-employment, or
If the business owner contributes to their plan, they need to contribute the same percentage of earnings to their employees' accounts. The deadline for making SEP IRA contributions5 is when you file your tax return, assuming you meet the deadline (including extensions) for filing a federal income tax return for that year. This is October 16, 2023 for 2022 contributions and October 17, 2022 for 2021 contributions.
This is why SEP IRAs are good for solopreneurs or those with few employees.
An individual 401(k), also known as a solo 401(k), is designed for self-employed business owners with no full-time employees (other than a spouse who works full-time for the business).
With an individual 401(k), contributions come from both the individual and the business.
For tax year 2022, the maximum contribution to an individual 401(k) is $61,0006 ($67,500 for individuals age 50 or older). That total includes:
- Employee salary deferral: Up to $20,500 ($27,000 for individuals ages 50 or older), plus
- Employer contributions: Up to 25% of compensation
For example, say you are a 45-year-old single-owner corporation with no employees. Your W-2 wages from the business are $100,000. For 2022, your maximum solo 401(k) contribution would be $45,500. That consists of:
- The maximum employee elective deferral of $20,500, plus
- An employer contribution of $25,000 (25% of your $100,000 of W-2 income)
If you were over the age of 50, you would be able to contribute an extra $6,500. In any event, your plan contributions can't be more than your income for the year.
The calculation can vary depending on your income, age, and whether your business is incorporated. A Solo 401(k) Contributions Calculator7 like the one available from AARP can help you calculate your maximum contribution.
The deadline to contribute to a solo 401(k) is the filing deadline of the business's tax return, not including extensions. So the deadline is generally March 15 or April 15, depending on how your business is structured.
Individual 401(k)s are good for self-employed people with no employees who want to make significant contributions. However, these plans require owners to file a tax return for the plan (Form 5500-EZ)8 if plan assets exceed $250,000.
For each tax year, you can contribute to both a SEP IRA and an Individual 401(k), but you cannot contribute more than the annual limit—$61,000 or 25% of compensation—to both plans combined.9
Contributions to a Roth IRA aren't tax-deductible, but earnings in the account are tax-free and withdrawals are tax-free in retirement after age 59½.
A savings incentive match plan for employees (SIMPLE) IRA is available to self-employed business owners with 100 or fewer employees. Like individual 401(k)s, SIMPLE IRA contributions include employee and employer contributions. However, they're easier to administer10—partly because there's no requirement to file a tax return for the plan.
For tax year 2022, self-employed individuals can contribute up to $14,000 to a SIMPLE IRA11 ($17,000 if age 50 or older at the end of the calendar year) before the employer contribution.
Then the employer must make one of the following additional contributions:
- 1.3% match of each plan participant's salary, or
- 2.2% of each employee's salary, whether or not they contribute.
The employee must make contributions within 30 days of the end of the tax year. The employer must deposit contributions by the tax deadline, including extensions. So employer contributions are due March 15 or April 15, depending on how your business is structured if the business doesn't extend its return, or September 15 or October 15 if it does.
A SIMPLE IRA is a good option for a small business with employees. Some business owners start with a SIMPLE IRA and switch to a 401(k) plan when they have more employees.
If you want to open a new retirement account or have questions about the best ways to contribute given your particular situation, reach out to your Synovus financial advisor. They can determine a retirement saving strategy that is most appropriate for you.
Important disclosure information
- U.S. Department of Labor, “The Employment Situation—April 2022," published May 6, 2022, accessed June 1, 2022. Back
- IRS.gov, “Distributions from Individual Retirement Arrangements (IRAs)," published April 25, 2022, accessed June 1, 2022. Back
- IRS.gov, “IRS Announced Changes to Retirement Plans for 2022," updated November 17, 2021, accessed June 1, 2022. Back
- IRS.gov, “How Much Can I Contribute to My Self-Employed SEP Plan if I Participate in My Employer's SIMPLE IRA Plan?" updated November 8, 2021, accessed June 1, 2022. Back
- IRS.gov, “SEP Plan FAQs," updated May 24, 2022, accessed June 1, 2022. Back
- IRS.gov, “One-Participant 401(k) Plans," updated November 8, 2021, accessed June 1, 2022. Back
- AARP, "Self-Employed 401(k) Contributions Calculator," updated May 2022, accessed July 24, 2022. Back
- IRS.gov, “Form 5500-EZ," 2021, accessed June 1, 2022. Back
- IRS.gov, "Publication 560," updated March 30, 2022, accessed July 24, 2022. Back
- Forbes Advisor, “SEP IRA vs Solo 401(k): Which Should You Choose?" updated December 20, 2021, accessed June 1, 2022. Back
- IRS.gov, “Retirement Topics – SIMPLE IRA Contribution Limits," updated November 8, 2021, accessed June 1, 2022. Back
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