Choose Your Self-Employed Retirement Plan—Starting Right Here

You may be self-employed and love it, but one day you’ll want to retire—and there’s no employer to help you establish a good retirement plan. You’ve got to do it yourself—and you can.

There are a number of retirement plans a self-employed person can establish. Some can be more applicable for a one-person business…and others where there are numerous workers in case you have employees. Some plans have maximum ages for owner participation, annual fees, or other requirements…and all have employee notification requirements.

Choosing the right plan depends on your financial circumstances, whether you have employees and the costs to establish and maintain the plan. Done properly, these plans can provide great tax benefits and defer substantial income tax. If you have self-employment income, discuss the pros and cons of different plan types with your accountant or tax preparer. To get you started, here are my thoughts (with help from my partner Brian Lovett, CPA), on some of the self-employed retirement plans that can be chosen…

SIMPLE Plan IRA (Savings Incentive Match Plan for Employees), SIMPLE 401k and Safe Harbor 401k. These are good plans when there are numerous low-paid employees who likely will choose to not participate in the plan. The owner would need to contribute 3% of salary only for those who participate. Nuts and bolts…

Deadline to establish plan: October 1 of the tax year.
Contribution deadline: Due date, including extensions, of the tax return for which the deduction is claimed. It is sooner for contributions by participants.
Maximum deduction for 2018: $12,500 plus $3,000 “catch up” amount for taxpayers over age 50. Additionally, employer matching contributions can be made that will exceed these limits (see next section).
Employee coverage:  There are choices for the employer, with one choice being that the employer must contribute 3% of compensation only for employees who elected to participate in the plan. Employee participation is completely voluntary. Note that the 3% can also be contributed for the owner of the business with no limit on compensation. With sufficiently high compensation, the total limit on the 2018 contribution could be $31,000 including the $3,000 catch-up amount. But the maximum employee matching amount cannot exceed the employee’s contribution. This plan cannot be established if the employer has more than 100 employees.
IRS filing requirements: None for SIMPLE. A 401k must file a Form 5500 when assets exceed $250,000.

401k and Roth 401k. The 401k is generally best for self-employed over age 55 in higher tax brackets where the current deduction would benefit them. The Roth 401k is generally best for those in lower brackets where the current deduction would not be that valuable to them…or to those that are fairly young, i.e., under age 50—because then the tax-free accumulation would have many years to compound. Of course, there are exceptions to these guidelines, and you should discuss your alternatives with your tax advisor. Nuts and bolts…

Deadline to establish plan: December 31.
Contribution deadline: Due date, including extensions, of the tax return for which the deduction is claimed. It is sooner for contributions by participants.
Maximum deduction for 2018: $18,500 plus $6,000 “catch up” amount for taxpayers over age 50. Additionally, employer matching contributions can be made that will exceed these limits.
Employee coverage: Voluntary, but where there are employees, the contributions for the owners could be limited based upon the employee participation, and there could be mandatory employer contributions for all eligible employees whether the employee participates or not.
IRS filing requirements: Form 5500 needs to be filed when assets exceed $250,000.

Solo 401k combined with a defined-contribution plan.  This would be the preferred plan for self-employed without any employees. It would permit the greatest deduction possible. Many brokerages have prototype solo 401k plans for their customers. Nuts and bolts…

Deadline to establish plan: December 31.
Contribution deadline: Due date, including extensions, of the tax return for which the deduction is claimed. It is sooner for contributions by participants.
Maximum deduction for 2018: 401K portion, $18,500 plus $6,000 “catch up” amount for taxpayers over age 50. Defined contribution portion, approximately 20% of net business income or 25% of the owner’s salary if paid by a corporation with a maximum of an additional $36,500.
Employee coverage: This plan is designed for sole proprietors with no employees.
IRS filing requirements: Form 5500 needs to be filed when assets exceed $250,000.

SEP Plan (Simplified Employee Pension). This would be a default plan for someone who did not set up a plan during the year since it can be opened retroactively. However, if there are employees, the employer contribution rules can make this pretty costly.  If the intent is to establish a plan for employees’ benefit, then this plan would work well because separate investment accounts can be opened for each employee who can then make his/her own investment decisions. There is also no annual reporting because the funds are deposited with a custodian who will report this to the IRS (similar to IRA reporting). Nuts and bolts…

Deadline to establish plan: Due date, including extensions, for the tax year for which the deduction will be claimed. With extensions, this can be as late as October 15 of the year following the year the deduction is claimed.
Contribution deadline: Due date, including extensions, of the tax return for which the deduction is claimed.
Maximum deduction for 2018: $55,000. No “catch up” contributions are permitted.
Employee coverage:  Employees must be covered.
IRS filing requirements: None

IRA and Roth IRA. These can be set up retroactively and can be used by anyone, whether employed or self-employed, who qualifies. For self-employed, the other plans permit greater contribution amounts, making them better in that respect. However, an IRA or Roth IRA can be used for a nonworking spouse, which the other plans do not allow. Nuts and bolts…

Deadline to establish plan: Tax return due date (not including extensions) for the tax year for which the deduction will be claimed. This can be as late as April 15 of the year following the tax year.
Contribution deadline: Tax return due date (not including extensions) for the tax year for which the deduction will be claimed.
Maximum deduction for 2018: $5,500 plus $1,000 “catch up” amount for taxpayers over age 50.
Employee coverage:  Not applicable.
IRS filing requirements: None

Keogh (HR-10), money purchase, profit sharing and defined contribution pension plans. These are older plans that have been replaced with the plans described above.  They are still being used, but we prefer versions of the other plans in this article. Nuts and bolts…

Deadline to establish plan: December 31 of the tax year.
Contribution deadline: Due date, including extensions, of the tax return for which the deduction is claimed.
Maximum deduction for 2018: $55,000 plus $6,000 “catch up” amount for taxpayers over age 50.
Employee coverage: Employees must be covered.
IRS filing requirements: All of these plans must file a Form 5500 annually regardless of amount of assets.