Best Retirement Accounts for the Self-Employed

Best Retirement Accounts for the Self-Employed

Best Retirement Accounts for the Self-Employed. When you decide to go out on your own and start your own business or gig, you are giving up structure and job benefits in exchange for greater freedom and flexibility. It’s no different when it comes to your retirement savings. Individuals who own their own businesses have significantly more options, both in terms of tax-advantaged retirement plans and investments within those plans. As a self-employed worker, you should consider the following retirement accounts and plans, as well as a few recommended service providers for each.

Traditional and Roth IRAs are two types of retirement accounts.

Most Suitable For: Those who are just starting out on their own; those who are looking for the most straightforward place to start In 2022, the maximum contribution is $6,000 ($7,000 for those over 50 years old).

A traditional IRA or a Roth IRA can be opened and funded by almost any adult in the United States. Traditional IRAs allow you to deduct the amount of your contribution from your current tax return. You will, however, be required to pay income taxes on the withdrawals you make during retirement, which will include all of the compounded gains.

Roth IRA contributions, on the other hand, do not qualify for an immediate tax deduction, but they do grow tax-deferred. Withdrawals made during retirement are not subject to income tax. It is important to note that traditional IRAs are subject to required minimum distributions (RMDs), whereas Roth IRAs are not subject to such requirements.

Traditional and Roth IRAs are extremely simple to set up for a variety of reasons:

Stockbrokers and other traditional investment brokerages: You can open an IRA at nearly any stockbroker or brokerage firm. That means you can invest in any publicly traded asset, including stocks, bonds, real estate investment trusts (REITs), exchange-traded funds (ETFs), and mutual funds.

Robo-advising is available: The majority of Robo-advisors provide this service as an option, allowing you to automate your investment process completely.

Free options: You have free options for both traditional investment brokerages and Robo-advisors, depending on your needs. You can open the account for free, and in many cases, there are no commissions or asset management fees associated with it.

All things considered, an IRA is a straightforward place to begin your search for tax-free ways to save for retirement. Just keep in mind that, as with all retirement planning accounts, if you take money out of your IRA before the age of 59 12, you will be subject to a 10 percent early withdrawal penalty from the Internal Revenue Service.

If you’re looking for a traditional brokerage firm to manage your own investments, consider Fidelity, Vanguard, TD Ameritrade, or Merrill Edge as potential options. There are no fees or commissions charged on trades or to open an account with any of them.

You could use a robot to manage your investments, such as SoFi Invest, Ally Invest, Betterment, or Acorns if that is what you prefer. The latter is equipped with a convenient savings automation feature that encourages you to save more and invest it on your behalf. My personal brokerage firm of choice is Charles Schwab, which provides both traditional brokerage and Robo-advisor services at no cost to customers.

For more information on these services, as well as other strong contenders, see this breakdown of the best individual retirement accounts.

Individual Retirement Account (IRA)

Best suited for: experienced real estate investors, as well as advanced investors and traders. In  2022, the maximum contribution is $6,000 ($7,000 for those over the age of 50). Advanced investors aren’t always interested in putting their retirement savings into publicly-traded assets such as index funds or bonds, for example. They believe they can outperform the market and prefer to invest in privately held assets that they are familiar with.

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Typical examples include real estate investors and developers. I know real estate investors who routinely earn 20 percent, 30 percent, 50 percent, or even higher returns on their investments in residential and commercial properties. What’s more, they have the knowledge and experience to earn those returns predictably, without the risk or volatility that comes with investing in the stock market.

As a result, given their specialization expertise, they want to invest in real estate through their tax-advantaged retirement accounts. They are able to do so through the use of a self-directed IRA.

Self-directed IRAs, on the other hand, require you to pay a custodian to ensure that you remain in compliance with IRS regulations. Custodians frequently charge one-time setup fees, annual maintenance fees, and transaction fees on top of their base fees. Which, as you can imagine, can add up quickly in terms of dollars.

Aside from the fees, the regulatory compliance and rules create their own set of headaches and bureaucracy. If you have such specialized knowledge that you can consistently outperform the market, you should consider opening a self-directed IRA. Although self-directed IRAs offer greater flexibility than traditional IRAs, the high barriers to entry, both in terms of experience and sometimes in terms of capital, make them more trouble than they are worth for the average middle-class investor. Even as a professional real estate investor myself, I don’t bother with them because of the substantial tax advantages that real estate currently provides. I’ve decided to stick with a traditional Roth IRA. After all, everyone should have some stocks in their portfolio, so why not hold them in a simple IRA?

Where Can I Open a Bank Account?

Real estate crowdfunding platforms such as Fundrise, which has partnered with self-directed IRA custodian Millennium Trust Company to offer investors a convenient and experienced custodian for real estate investments, are becoming increasingly popular among investors.

If you like the idea of setting up a self-directed IRA to invest in real estate, but aren’t ready to make a direct investment in a property through your IRA, you might want to consider purchasing shares in real estate crowdfunding investments as an alternative. Streitwise, Diversyfund, and GroundFloor are some of the other options available in addition to Fundrise.

3. SEP-IRA (Simplified Employee Pension)

Self-employed individuals with no employees; small family businesses; and those seeking immediate tax deductions are the best candidates.

Adults over the age of 50 can make a contribution up to the lesser of $58,000 or 25 percent of their income in 2021 or $61,000 or 25 percent of their income in 2022 (there is no catch-up contribution for adults over the age of 50). The SEP IRA, also known as the Simplified Employee Pension IRA, is a type of retirement plan that is tailored to the needs of self-employed individuals and small businesses. Individual Retirement Accounts (IRAs) are similar to other types of retirement accounts in that they can be opened at most major investment banks and invested in any securities you choose.

SEP IRAs, in contrast to traditional IRAs, do not offer a Roth option. The contribution is deductible on your current year’s tax return, but you will be required to pay taxes on any withdrawals you make during your retirement. The Internal Revenue Service allows you to contribute up to 25 percent of your net income, with a maximum contribution of $58,000. As a result, it is one of the more adaptable retirement accounts available today. Unfortunately, for those over the age of 50, SEP IRAs do not allow for an additional catch-up contribution to be made.

What’s the twist? Whatever percentage of the contribution the owner sets aside for himself or herself, he or she must also contribute for their employees. There is no requirement for employees to contribute to their own accounts — in fact, employees are not permitted to contribute to their own accounts at all.

Due to the fact that few employers are willing to provide an additional 25 percent in retirement benefits for each employee, the SEP IRA is best suited for solopreneurs or self-employed individuals who do not have any employees. It also makes sense in some family businesses where the owner is willing to pay a premium to ensure the well-being of their children after they have left the company.

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Where Can I Open a Bank Account?

SEP IRAs are available from the majority of large investment brokerage firms. Consider reputable, flexible investment companies such as Fidelity, Vanguard, or Charles Schwab. To have your SEP IRA managed by an automated investment advisor, check out Schwab or Betterment.

4. SIMPLE IRA (individual retirement account)

Small businesses with fewer than 100 employees are the best fit. Contribution Limits: $13,500 in 2021 and $14,000 in 2022 ($16,500 in 2021 and $17,000 in 2022 for those 50 and older). In comparison to more complex and expensive 401(k) plans, the SIMPLE IRA is simpler and less expensive. They are effective for small businesses with a few employees, but they are ineffective for businesses with 100 or more employees.

Employers must offer to make contributions to their employees’ retirement accounts, but not at the same rate as the owner makes contributions to his or her own. This is a distinct advantage over SEP IRAs, which require contributions that are exactly the same. Employers can approach contributions in one of two ways: either as a percentage of payroll or as a percentage of total compensation.

Matching employee contributions up to 3 percent of their income, or a combination of both. Offer to make a 2 percent contribution regardless of how much the employee contributes. One advantage of SIMPLE IRAs over 401(k) plans is that they can be set up by anyone. They are registered with traditional brokerage firms, allowing participants to invest in any securities they desire. Within the first two years of opening a SIMPLE IRA, however, you are not permitted to roll over the funds to another type of IRA, unlike 401(k) accounts.

Where Can I Open a Bank Account?

SIMPLE IRAs are available from the vast majority of large investment brokerages. This includes well-known financial institutions such as Fidelity, Vanguard, TD Ameritrade, and Charles Schwab. Some robo-advisors, such as Betterment, also provide these services. Keep in mind that, in contrast to traditional IRAs, many of these brokerages charge fees for SIMPLE IRAs. Before making a commitment, double-check all fees.

5. Solo 401 (individual retirement account) (k)

For sole proprietors and spouse-owned businesses, this is the best option. A maximum of $58,000 in 2021 and $61,000 in 2022 (with a contribution limit of $61,500 in 2021 and $67,500 in 2022 for those 50 and older).

When you set up a 401(k) plan for your company, you can make contributions on behalf of both the company and the employees. As an employee, you’ll be eligible for up to $19,500 in 2021 and $20,500 in 2022, which equates to up to 100 percent of your earnings.

Employers can contribute up to 25 percent of net profits, with total contributions capped at $58,000 in 2021 and $61,000 in 2022. Employees can contribute up to 25 percent of net profits. If you are 50 or older, you can make a catch-up contribution of an additional $6,500, which is subject to the same percentage restrictions as the regular contribution. A significant advantage of this account is the high annual contribution limits, which make it a particularly appealing option for adults over 50 who can make catch-up contributions (which they cannot do with SEP IRAs). In addition, unlike SEP IRAs and SIMPLE IRAs, you can set up a Roth version of a 401(k) plan (k).

If the business owner has a solo 401(k), they can hire their spouse, and both of them can contribute up to the maximum amounts specified above. Couples can benefit from this by making the most of their tax-sheltered retirement savings.

If you have any employees other than your spouse, you must open a standard 401(k) for your business rather than a solo 401(k) to be eligible for retirement benefits (k). You are not required to make contributions to your employees’ retirement accounts, but you may do so if you wish. Solo 401(k)s give account holders the freedom to invest in any asset they choose. This includes both publicly traded securities and “alternative” investments, such as real estate, that are not traded on an exchange. In most cases, when opening a full-service 401(k) custodian account for a business with employees, you will be presented with a limited number of investment options to choose from.

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Where Can I Open a Bank Account?

You can open a solo 401(k) account at any of the major brokerage firms listed above, including Fidelity, Vanguard, TD Ameritrade, Merrill Edge, and Charles Schwab, among others. Betterment provides excellent robo-advisor service for solo 401(k) accounts, just as it does for the other types of accounts. Most brokers charge some sort of fee, so do your research before opening an account with anyone firm. Some of those brokers also provide complete 401(k) plans for businesses that have employees to their clients. Schwab, Merrill Edge, Fidelity, and T. Rowe Price are all well-regarded providers of 401(k) plans. Another excellent plan is provided by the payroll processing company ADP.

6. Defined Benefit Plan (DBP) –

High earners with established businesses and no employees are the best candidates. Contribution Limit: Varies depending on the contributor’s age, income, and anticipated retirement age.

Retirement has changed dramatically in recent decades, with the decline of the pension being one of the most well-documented and obvious examples of this change. However, if you really want one, you can always make one yourself.

Creating your own pension plan allows you to make contributions without being restricted by the hard limits imposed by other plans. Because of life expectancy data, contributions are limited, but you can likely contribute six figures to your plan each year without incurring any tax consequences. In retirement, the Internal Revenue Service taxes your pension payments; there is no Roth equivalent.

Setting up a defined benefit plan is only sensible if you anticipate making such large contributions in the future. In addition to high setup and maintenance fees, these plans also come with a number of regulatory and paperwork headaches.

If you’re a sole proprietor or run a family business, you’ll only want to set one of these up. Generally speaking, you are also responsible for funding the pensions of your employees. If you employ your spouse or children, this makes sense; however, as a small-business owner, you are unlikely to be able to afford to pay for your cashier’s retirement plan.

In the same way that other retirement plans are restricted, you cannot withdraw money before the age of 59 12, or you will be subject to a 10 percent penalty plus back taxes.

Where Can I Open a Bank Account?

Small businesses can take advantage of defined benefit plans, which are less common than the other options listed above.

The personal defined benefit plan of Charles Schwab, however, is an exception. They charge a $2,250 one-time setup fee, as well as an annual fee that starts at $1,750 for plans with a single participant. If you have any employees, be prepared to pay a higher salary.

Schwab advises against establishing one if you intend to make annual contributions of less than $90,000 for a period of at least five years. You should only consider a defined benefit plan if you earn a substantial amount of money and want to maximize your contributions as well as your tax benefits.

Lastly, a word about

Self-employment provides greater flexibility in selecting a tax-advantaged retirement account than does employment with a W2 employer. Self-employed individuals, on the other hand, are not eligible for matching employer contributions. They are responsible for funding their accounts entirely on their own dime.

Your ideal business plan is determined by your income and the size of your company. Consult with your accountant or financial advisor to determine the best course of action for you and your company. Please make certain that you inquire about the possibility of including your spouse into the plan in order to maximize the tax savings for both of you.

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