Retirement Plans for Sole Proprietors: Your Path to Financial Security

Key Points:

• Sole proprietors can choose from various tax-advantaged retirement plans, including Solo 401(k)s, SEP IRAs, SIMPLE IRAs, and Traditional or Roth IRAs.
• The best plan depends on your income, goals, and administrative preferences.
• Options like Solo 401(k)s and SEP IRAs allow high contributions and tax benefits, while SIMPLE IRAs and Traditional/Roth IRAs provide simpler alternatives.
• Self-employed individuals can build robust retirement savings with the right plan tailored to their needs.

As a sole proprietor, retirement planning is entirely in your hands—which can be daunting when running a business independently. Thankfully, there are retirement plan options specifically designed to help you grow your wealth, reduce taxes, and secure your future, and you don’t have to attempt to find them on your own.

Here’s an overview of sole proprietor retirement plans that can help you choose the right one for your needs.

Simplified Employee Pension (SEP) IRA

A SEP IRA is one of the most popular sole proprietor retirement plan options because of its simplicity and high contribution limits.

Key features include:

• Contribute up to 25% of your net earnings, with a maximum limit of $69,000.
• Contributions are tax-deductible, and funds grow tax-deferred until retirement.
• Flexible contributions let you adjust based on your income year to year.

Considerations:

If you have employees, you must contribute the same percentage to their plans.

The SEP IRA is ideal for sole proprietors with fluctuating incomes who want a straightforward, cost-efficient retirement plan.

Solo 401(k): High Contribution Limits and Flexibility

The Solos 401(k) is tailored for sole proprietors without employees. It’s often regarded as the best retirement plan for sole proprietors without employees because of its dual contribution structure.

Key Features Include:

• As both employer and employee, you can contribute up to $69,000 ($23,000 as employee deferral, plus employer contributions)
• Catch-up contributions of $7,500 are available for those 50 or older.
• Some plans offer a loan provision, letting you borrow from your retirement savings if needed.

Considerations:

• A Solo 401(k) does require more administrative work, such as filing paperwork if plan assets exceed $250,000

If maximizing contributions is your priority, the Solo 401(k) offers unmatched savings potential.

SIMPLE IRA: A Straightforward Option

A SIMPLE IRA is another choice for sole proprietors and small business owners. It’s easy to set up and maintain while offering reasonable contribution limits.

Key Features Include:

• You can contribute up to $16,000 with an extra $3,500 for those 50 or older.
• Employers must match employee contributions (up to 3%) or provide a 2% nonelective contribution.
• Contributions are fully vested immediately

Considerations:

• Contribution limits are lower than those of Solo 401(k)s or SEP IRAs.

The SIMPLE IRA works well for those with modest income or plans to hire employees in the future.

Traditional and Roth IRAs

Traditional and Roth IRAs have lower contribution limits but are excellent supplementary savings vehicles.

Key Features Include:

• Contribute up to $7,000 and an additional $1,000 for those 50 or older.
• Traditional IRA contributions may be tax-deductible, while Roth IRA withdrawals are tax-free in retirement.
• Easy to set up and maintain without administrative complexity.

Considerations:

• Contribution limits are lower than other plans, making them ideal for additional savings rather than primary plans.
• Roth IRAs have income limits for eligibility

These IRAs are great for diversifying your retirement savings strategy and building a tax-free income stream.

Which Sole Proprietor Retirement Plan Options Is Right for You?

Selecting the best retirement plan for a sole proprietor depends on factors like your income, retirement goals, and the level of administration responsibility you’re comfortable managing.

Quick Tip: If you are unsure which plan to choose, there’s no shame in contacting a trusted fiduciary like Dechtman Wealth. We can help align your decision with your financial goals, best suiting your needs.

Frequently Asked Questions About Sole Proprietor Retirement Plans:

1. What qualified retirement plan is available for self-employed individuals?

Self-employed individuals can choose from Solo 401(k)s, SEP IRAs, SIMPLE IRAs, and Traditional or Roth IRAs, all offering tax-advantaged savings and flexibility.

2. What is the best retirement plan for a business owner?

The best plan depends on whether you have employees. Solo 401(k)s are ideal for sole proprietors, while SEP IRAs and SIMPLE IRAs suit business owners with staff.

3. Which retirement plan is best for self-employed?

Many self-employed individuals prefer the Solo 401(k) for its high contribution limits and flexibility, while others value the simplicity of a SEP IRA.

4. Can a sole proprietor have a retirement plan?

Absolutely! Sole proprietors have access to a range of retirement plans tailored to their needs, from Solo 401(k)s to SEP IRAs and beyond.

Your Retirement, Your Way

Choosing the right retirement plan for a sole proprietor is an essential step toward achieving your long-term goals. Whether you are looking to maximize your savings, minimize taxes, or keep things simple, there’s a plan that aligns with your specific needs, and we would be honored to help you find it.

At Dechtman Wealth, we can help sole proprietors navigate their options confidently and easily, making what appears to be a complicated process far more accessible and straightforward. Contact us today and let us assist in building your personalized retirement strategy that supports your lifestyle and aspirations for the future.