Your Self-Employed Retirement Game Plan

Business owners pour their energy into growing a business, but many aren’t sure how to turn that success into future security.

Now, having a clear financial strategy is essential.

A crucial part of this plan is understanding what type of retirement account you need.

As a business owner, you have many choices.

However, not knowing your choices or misunderstanding how they work can cost you thousands in additional taxes (or undersaved dollars).

In this newsletter, I wanted to make you aware of some of the main choices so that you can understand what is available to you.

SEP IRA

A SEP IRA (Simplified Employee Pension) is an excellent choice for a self-employed person looking for simplicity.

It's much easier to set up and manage than a Solo 401(k), making it a great entry point into serious retirement savings.

With a SEP IRA, only the employer can make contributions, up to 20% of your net self-employment income if you’re a sole proprietor.

Please keep in mind it can be up to 25% of W-2 wages if you’re an S Corp owner.

The biggest advantage of this plan is its simplicity. There is minimal paperwork and no annual filing requirements.

Pro Tip #1. SEP IRAs don’t play well with back-door Roth conversions. Definitely worth being aware of if you want some Roth money in your future.

Solo 401(k)

The Solo 401(k) is arguably the most versatile and powerful choice for self-employed individuals and business owners with no full-time employees (a spouse can be an exception).

It gets its name because it's essentially a 401(k) for a one-person business.

In my experience, most people simply default to the SEP IRA without truly understanding the benefits of Solo 401(k)s!

In this plan, you play two roles: employee and employer. This allows you to make contributions from both sides, dramatically increasing your annual savings limit.

As the Employee, you can contribute up to the annual limit, just like in a regular 401(k).

As the Employer, you can make an additional "profit-sharing" contribution of up to 25% of your net self-employment income.

This combination often allows for the highest total annual contributions, making it an excellent vehicle for those looking to "catchup" or save aggressively.

Pro Tip #2. Solo 401(k)s are great for back-door Roth conversions.

Cash Balance Plan (CBP)

For high-income earners, a Cash Balance Plan is the ultimate tool for super-charged retirement savings.

This is a type of defined-benefit pension plan, so it's more complex and requires professional administration, including ongoing actuarial support and funding commitment.

But the payoff can be significant!

A Cash Balance Plan allows for significantly higher contributions than a Solo 401(k) or SEP IRA, sometimes in the $100,000’s per year.

It's often used in combination with a Solo 401(k) to maximize tax-deductible contributions and accelerate wealth accumulation.

This is an ideal strategy for those who are late to the savings game or have high income they want to defer.

Want to hear more about how a Cash Balance Plan helped one of our clients? Check out this video with Ava K.

So which plan should you choose?

Choosing the best plan depends on your unique circumstances, including your income, age, and whether or not you have employees.

Here are my general guidelines and please reach out if you need more help.

SEP IRAs are great if you want a very simple and low maintenance plan. I usually recommend it to our clients with income at around $100,000 or below.

Choose a Solo 401(k) if you are a business owner with no full-time employees and you want to contribute the maximum amount possible each year.

For our clients who consistently earn about $100,000 per year, I usually skip the SEP IRA route and suggest creating a Solo 401(k) plan.

Consider a Cash Balance Plan if you have a high income and are looking to save and get a tax deduction for a substantial amount of money each year.

Do I need to know anything else?

If you plan to grow your firm and add employees, consider creating a SIMPLE IRA.

As the name implies, it’s a relatively simple way to provide coverage to your employees.

Please understand that you would most likely need to modify your Solo 401(k) plan provisions or even replace the entire plan if you plan to add employees to it.

So plan accordingly and ahead of time!