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Self-Employed Retirement Plans for Small Business Owners

Manasa Reddigari
April 8, 2019

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Not having access to an employer-sponsored 401(k) plan is no reason to delay your retirement. There are many retirement plans available to help fund their golden years. Take a look at the most common self-employed retirement plans and the benefits and annual contribution limits of each.

Which self-employed retirement plans are available to me?

From self-employed 401(k) plans to IRAs, business owners have many retirement plans at their disposal:

IRA

Individuals can open either a Traditional IRA (pre-tax, which means you'll pay income tax on withdrawal) or a Roth IRA (post-tax, contributions made after paying income tax, thus no income tax on withdrawal). You can have both a Traditional and a Roth IRA; however, the annual contribution will apply across IRAs. These are generally considered the most straightforward self-employed retirement plans since a custodian administers the programs. And there are numerous custodians from which you can choose nationwide (e.g., Vanguard, Fidelity, etc.).

SEP IRA

The Simplified Employee Pension plan permits business owners to make contributions to each employee's IRA – including their retirement fund. SEP IRAs favor cyclical companies since contributions for a given tax year can occur up to the final tax filing date of the following year. The disadvantage of these self-employed retirement plans is that they don't permit employee contributions.

SIMPLE IRA

This option for businesses with 100 or fewer employees permits employees and employers to contribute. Employers must either match the employee's net income or a choose nonelective contribution. Under the match model, the employer is not required to add money to the account if the employee doesn't participate. Under the nonelective contribution model, the employer must contribute even if the employee doesn't chip in.

Individual 401(k)

This self-employed 401(k) plan comes with similar rules as a traditional 401(k) plan and is available to business owners with no employees (other than you and your spouse). The business owner can make traditional (pre-tax) or Roth (post-tax) contributions up to a total of $56,000 in 2019 (plus an extra $6,000 in catch-up contributions for individuals 50 and over).

Because you play both roles as employer and employee, you can make two types of contributions:

  • Employee salary deferral contributions
  • Employer profit-sharing contributions

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Keogh

These self-employed retirement plans for unincorporated businesses (e.g., sole proprietorships, partnerships, and LLCs) have fallen out of favor. They were mainly replaced by SEP IRAs after tax law changes because they have similar annual contribution limits.

Keogh plans come in two flavors:

  • Defined-contribution (contributions allowed up to a limit)
  • Defined-benefit (this acts as a self-funded pension plan).

What's the annual contribution limit for self-employed retirement plans?

The annual contribution limit for self-employed retirement plans varies by the plan type:

IRA

Your total contribution across IRAs can't exceed $6,000 ($7,000 for people 50 or older).

SEP IRA

The 2019 SEP IRA contribution limit max's out at 25% of compensation with an annual maximum of $56,000— compared to a maximum of $6,000 ($7,000 with a catch-up contribution) allowed in a Traditional or Roth IRA. Looking back at 2018, the SEP IRA contribution limit was still up to 25% of individual earnings but topped out at $55,000.

SIMPLE IRA

SIMPLE stands for Savings Incentive Match Plan for Employees and available only at companies with less than 100 employees.

Employees can contribute up to $13,000 in 2019, up from $12,500 in 2018, if under the age of 50. Employees 50 and older can set aside up to $19,000 in catch-up contributions.

Employers must contribute either a matching contribution up to 3 of employee net income (not subject to an annual income limit) or a nonelective contribution of 2 percent of employee net income (up to the annual limit of $275,000 for 2018 and $280,000 for the 2019 tax year).

Individual 401(k)

The business owner can make traditional (pre-tax) or Roth (post-tax) contributions up to a total of $56,000 in 2019 (plus an extra $6,000 in catch-up contributions for individuals 50 and over).

With the Solo 401k, you can max out your employee salary deferral contributions at $19,000 according to the new IRS limit. That means you can contribute a total of $38,000 as a profit sharing contribution because you are both the employer and employee.

Keogh

Business owners can make a tax-deductible contribution of up to 25 percent of the compensation of $56,000 in 2019.

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MileIQ: Mileage Tracker & Log

MileIQ Inc.

GET — On the App Store

View
MileIQPricing
Open MenuClose Menu

Not having access to an employer-sponsored 401(k) plan is no reason to delay your retirement. There are many retirement plans available to help fund their golden years. Take a look at the most common self-employed retirement plans and the benefits and annual contribution limits of each.

Which self-employed retirement plans are available to me?

From self-employed 401(k) plans to IRAs, business owners have many retirement plans at their disposal:

IRA

Individuals can open either a Traditional IRA (pre-tax, which means you'll pay income tax on withdrawal) or a Roth IRA (post-tax, contributions made after paying income tax, thus no income tax on withdrawal). You can have both a Traditional and a Roth IRA; however, the annual contribution will apply across IRAs. These are generally considered the most straightforward self-employed retirement plans since a custodian administers the programs. And there are numerous custodians from which you can choose nationwide (e.g., Vanguard, Fidelity, etc.).

SEP IRA

The Simplified Employee Pension plan permits business owners to make contributions to each employee's IRA – including their retirement fund. SEP IRAs favor cyclical companies since contributions for a given tax year can occur up to the final tax filing date of the following year. The disadvantage of these self-employed retirement plans is that they don't permit employee contributions.

SIMPLE IRA

This option for businesses with 100 or fewer employees permits employees and employers to contribute. Employers must either match the employee's net income or a choose nonelective contribution. Under the match model, the employer is not required to add money to the account if the employee doesn't participate. Under the nonelective contribution model, the employer must contribute even if the employee doesn't chip in.

Individual 401(k)

This self-employed 401(k) plan comes with similar rules as a traditional 401(k) plan and is available to business owners with no employees (other than you and your spouse). The business owner can make traditional (pre-tax) or Roth (post-tax) contributions up to a total of $56,000 in 2019 (plus an extra $6,000 in catch-up contributions for individuals 50 and over).

Because you play both roles as employer and employee, you can make two types of contributions:

  • Employee salary deferral contributions
  • Employer profit-sharing contributions

Keogh

These self-employed retirement plans for unincorporated businesses (e.g., sole proprietorships, partnerships, and LLCs) have fallen out of favor. They were mainly replaced by SEP IRAs after tax law changes because they have similar annual contribution limits.

Keogh plans come in two flavors:

  • Defined-contribution (contributions allowed up to a limit)
  • Defined-benefit (this acts as a self-funded pension plan).

What's the annual contribution limit for self-employed retirement plans?

The annual contribution limit for self-employed retirement plans varies by the plan type:

IRA

Your total contribution across IRAs can't exceed $6,000 ($7,000 for people 50 or older).

SEP IRA

The 2019 SEP IRA contribution limit max's out at 25% of compensation with an annual maximum of $56,000— compared to a maximum of $6,000 ($7,000 with a catch-up contribution) allowed in a Traditional or Roth IRA. Looking back at 2018, the SEP IRA contribution limit was still up to 25% of individual earnings but topped out at $55,000.

SIMPLE IRA

SIMPLE stands for Savings Incentive Match Plan for Employees and available only at companies with less than 100 employees.

Employees can contribute up to $13,000 in 2019, up from $12,500 in 2018, if under the age of 50. Employees 50 and older can set aside up to $19,000 in catch-up contributions.

Employers must contribute either a matching contribution up to 3 of employee net income (not subject to an annual income limit) or a nonelective contribution of 2 percent of employee net income (up to the annual limit of $275,000 for 2018 and $280,000 for the 2019 tax year).

Individual 401(k)

The business owner can make traditional (pre-tax) or Roth (post-tax) contributions up to a total of $56,000 in 2019 (plus an extra $6,000 in catch-up contributions for individuals 50 and over).

With the Solo 401k, you can max out your employee salary deferral contributions at $19,000 according to the new IRS limit. That means you can contribute a total of $38,000 as a profit sharing contribution because you are both the employer and employee.

Keogh

Business owners can make a tax-deductible contribution of up to 25 percent of the compensation of $56,000 in 2019.

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