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Self-directed IRAs work great for those who want to make their own financial decisions, but what about people who are self-employed or own small businesses? Where do you turn when it’s time to think about retirement plans?
Most companies are not big enough to qualify for a great retirement plan. Therefore, the IRS has created several small business retirement plans for these individuals to take advantage of. When it comes to retirement age, many self-employed and small business owners could be left with a meager Social Security check that won’t meet the needs of the lifestyle they’re used to.
Fortunately, more reputable self-directed IRA custodians also offer plans like the SEP, SIMPLE, Solo 401(k), and Roth Solo 401(k).
Simplified Employee Plan (SEP)
The SEP is a retirement plan for self-employed individuals and small business owners. Typically, the small business has fewer than 25 employees. This plan offers the individual a retirement account that does not require complicated qualified plans like a conventional IRA or 401(k). Benefits included:
• All contributions are tax-deductible and are combined with savings that are tax-deferred until withdrawal.
• The employer can contribute up to 25% of the employee’s salary with a maximum of $49,000 each year.
Savings Incentive Equalization Plan for Employees (UNICO)
If you own a business with fewer than 100 employees and don’t have any other type of qualifying plan available, SIMPLE is something to consider. With this plan, you and your spouse can contribute if you earn $45,000 or less per year. Benefits included:
• Tax-deductible investments compounded with tax deferral until time of withdrawal.
• Employee contributions up to $11,500 for those under 50 years of age.
• Employee contributions up to $14,000 for people over 50 years of age.
• Employers match dollar for dollar up to 3% of the employee’s compensation.
401(k) only
Think of this plan as a combination of SIMPLE and SEP. Basically, a sole proprietorship is offered a qualified plan that allows for higher contributions and higher deductions. Benefits included:
• You do not have to be incorporated to qualify. This includes sole proprietors, partnerships, and corporations as well.
• Contributions can be up to $16,500 per year if you are under age 50.
• Contributions can be up to $22,000 per year if you are over 50 years of age.
• You can also include 0-25% of your profit share.
Roth only 401(k)
The Roth works just like the Solo 401(k), but it also has the added tax benefits of a Roth IRA. Contribution levels remain the same, but taxes are paid before you retire. Additional benefits include:
• If your income limits exceed the qualification levels for a Roth IRA, you may want to consider the Roth Solo 401(k) as an option.
There is a Retirement Plan for Everyone
If you thought you could never participate in a qualified plan and you were starting to look at other investment opportunities, you still have other options. Generally, a retirement plan will offer compound interest through tax deductions and tax deferrals that other types of investments cannot.
If you’re researching the different types of self-directed IRAs you may qualify for, you may want to consider one of these four options.