Retirement 101 Part 3: Small Businesses / entrepreneurs /solo-preneurs / independent contractors

In the dynamic landscape of entrepreneurship, small business owners, freelancers, and solo workers often wear multiple hats, and too often, a financial planner, ain't one of them. Amidst the daily juggle of tasks, planning for retirement can sometimes take a backseat. But securing your financial future is paramount, and despite what you might have previously believed, there's no shortage of retirement account options to help you do just that.

In this comprehensive guide, we'll explore a range of retirement accounts tailored to small business owners, entrepreneurs, and solo workers' unique needs. From Traditional and Roth IRAs to SIMPLE IRAs, SEP IRAs, and Solo 401(k)s, we'll uncover the benefits and intricacies of each, empowering you to make informed choices about your financial future.

⭐️ - indicate the most unique quality of the account.

Traditional IRAs (Individual Retirement Accounts)

Who Can Use Them: Anyone with earned income can contribute.

Key Benefits:

•  Contributions are tax-deductible in the year they are made, potentially reducing your taxable income for that year and lowering your immediate tax bill.
•  Earnings grow tax-deferred until withdrawal, allowing your investments to compound over time without immediate taxation.
•  Wide range of investment choices. Your account can be managed by a person, robonvestor, or self-managed.
• ⭐️ Anybody can open: A great retirement plan when your company does not provide a retirement benefit, as it does not require employment to open. 

Tax Treatment of Contributions:

•  Contributions to a Traditional IRA are made with pre-tax dollars for most individuals. However, if an employer-sponsored retirement plan covers you or your spouse, income limits may affect the deductibility of your contributions. You cannot contribute more than $22,500 in a 401k and IRA combined. 

Contribution Limits (2023):

•  In 2023, the annual contribution limit for a Traditional IRA is $6,500 for individuals under 50. If you're 50 or older, you can make an additional catch-up contribution of up to $1,000, bringing the total limit to $7,500.

Required Minimum Distributions (RMDs):

•  Starting at age 72 (or 70½ for those who turned 70½ before January 1, 2020), you must begin taking Required Minimum Distributions (RMDs) from your Traditional IRA each year. These withdrawals are subject to income tax.

Roth IRAs

Who Can Use Them: Individuals with income below a certain threshold.

➡️Individuals who have a modified adjusted gross income of $153k or less

➡️Married filing jointly have a modified  adjusted gross income of $218k or less

Key Benefits:

•  ⭐️Contributions are made with after-tax dollars. After five years, all contributions can be taken out of the account tax-free, with no penalty. Said in a different way You can take out any contributuons before retirement without penalty or tax implication, if the account has been opened for five years. 
•  ⭐️ Tax-Free Withdrawals: One of the primary advantages of a Roth IRA is that qualified withdrawals in retirement are entirely tax-free, including both contributions and earnings. This can lead to significant tax savings in retirement.
•  ⭐️No required minimum distributions (RMDs): during the account holder's lifetime and no age limits for contributions, allowing individuals to continue contributing as long as they have earned income.
•  Wide range of investment choices. Your account can be managed by a person, robonvestor, or self-managed.

 Tax Treatment of Contributions:

•  Contributions to a Roth IRA are made with after-tax dollars, so you won't receive an immediate tax deduction for contributing. However, this means you can potentially withdraw your contributions at any time without taxes or penalties after five years of owning the account.

Contribution Limits (2023):

•  In 2023, the annual contribution limit for a Traditional IRA is $6,500 for individuals under 50. If you're 50 or older, you can make an additional catch-up contribution of up to $1,000, bringing the total limit to $7,500. You cannot contribute more than $22,500 in a 401k and IRA (roth or traditional) combined. 

⭐️No Required Minimum Distributions (RMDs):

•  Roth IRAs do not have RMDs during the account holder's lifetime. This means you can leave the money invested for as long as you want, potentially passing it on to heirs without the immediate tax implications of RMDs.

SIMPLE IRAs (Savings Incentive Match Plan for Employees)

Who Can Use Them: Small businesses with up to 100 employees, including self-employed individuals. Employers establish SIMPLE IRAs for their employees, and employees can also contribute to their own accounts.

Key Benefits:

•  Employer Matching Contributions: One of the primary advantages of SIMPLE IRAs is that employers are required to contribute to their employees' accounts. ⭐️ This provides an opportunity for employees to receive additional retirement savings beyond their own contributions.
•  Tax-Deferred Growth: Any earnings on investments within a SIMPLE IRA grow tax-deferred until you withdraw them in retirement.
•  Simplified Administration: SIMPLE IRAs are easier to set up and maintain than traditional 401(k) plans, making them an attractive option for small businesses.

Tax Treatment of Contributions:

•  Contributions to a SIMPLE IRA are made with pre-tax dollars, reducing your annual taxable income. This can result in a lower tax withholding on your paycheck, increasing your take-home pay. 

Contribution Limits (2023):

• Employees can contribute up to $15,500 to a SIMPLE IRA. If you're 50 or older, you can make an additional catch-up contribution of up to $3,500, bringing the total limit to $19,000.

⭐️ No Age or Income Limits:

•  Unlike some retirement plans, SIMPLE IRAs do not have age or income restrictions, allowing employees of all ages and income levels to participate.

SEP-IRAs (Simplified Employee Pension IRAs)

Who Can Use Them: SEP IRAs are designed primarily for self-employed individuals and small business owners, including sole proprietors, partnerships, and corporations. If you have employees you must establish a SEP IRA for them and contribute the same amount per employee. 

Key Benefits:

•  Tax-Deductible Contributions: One of the primary advantages of SEP IRAs is the ability to make tax-deductible contributions for both the employer and eligible employees. Employers can claim a tax deduction for contributions made on behalf of employees
•  Easy to set up and maintain.
•  Flexible contributions: Each year you can adjust how much you put in depending on your profit 

Tax Treatment of Contributions:

•  Contributions to a SEP IRA are tax-deductible for employers, reducing their taxable income. Employees do not make contributions; instead, the employer contributes on their behalf.
•  SEPs act like a traditional retirement account, meaning taxes are deferred until retirements at which point you will have to pay ordinary income on contributions and earnings. 

 Contribution Limits (2023):

•  In 2023, employers can contribute up to 25% of each eligible employee's compensation or a maximum of $66,000 per employee, whichever is less. Contributions to SEP IRAs are made solely by the employer.

What Employee is Eligible?:

•  ⭐️ Employees are eligible if they are at least 21 years old, have worked for the employer in three of the last five years, and received at least $600 in compensation in the current year (2021). Employers can set less restrictive eligibility criteria if desired.

Self-Employed 401(k) or Solo 401(k)

Who Can Use Them: Solo 401(k) plans are designed for self-employed individuals or small business owners with no full-time employees other than a spouse.

Key Benefits:

•  High Contribution Limits: Solo 401(k)s allow for substantial contributions, including both employer and employee contributions.
•  ⭐️ Tax Benefits: Contributions to a Solo 401(k) are typically tax-deductible, reducing your taxable income for the year. Potential for Roth Component: Some Solo 401(k) plans offer a Roth sub-account, allowing for after-tax contributions and tax-free withdrawals in retirement.
•  Investment Flexibility: You have control over how your contributions are invested, which can include a wide range of investment options.
•  Loan Option: Some Solo 401(k) plans allow you to borrow from your account in certain circumstances. 

Tax Treatment of Contributions:

•  Contributions to a Solo 401(k) are typically made with pre-tax dollars, reducing your taxable income for the year in which they are made. However, you can also set up a Roth Solo 401(k), where contributions are made with after-tax dollars, allowing for tax-free withdrawals in retirement.

⭐️ Contribution Limits (2023): 

•  One of the primary advantages of a Solo 401(k) is the high contribution limits, allowing for substantial retirement savings. In 2023, you can contribute up to $22,500 as an employee, plus an additional $7,500 if you're 50 or older. As the employer, you can contribute up to 25% of your net self-employment income, with a combined maximum limit of $66,000 (or $73,500 if 50 or older).

Required Minimum Distributions (RMDs) rules:

•  As long as you are actively working, you are not required to take RMDs, offering flexibility in managing your retirement income. Once you stop working you must take out withdrawals at 73. If you or your spouse owns more than 5% of the business will have to take out RMDs at 70.5 even if they’re actively working.

As entrepreneurs, small business owners, and solo workers, you're pioneers of your destinies, crafting your careers and financial legacies. With the retirement account options at your disposal—Traditional and Roth IRAs, SIMPLE IRAs, SEP IRAs, and Solo 401(k)s—you have the tools to build a secure and prosperous retirement.

Your dedication to your work is admirable, and it's equally crucial to prioritize your financial well-being. Remember, planning for retirement isn't just about securing your future; it's a testament to your commitment to lifelong financial health. So, as you forge ahead on your entrepreneurial journey, let these retirement accounts be your steadfast companions, paving the way to a rewarding retirement chapter.

Disclaimer: This website and its content is owned by Beyond The Green Coaching. AJ Schneider and the Financial Freedom Coaches are NOT financial planners, attorneys, accountants, therapists, counselors or psychologists. The information on this website and in the resources provided is for educational and informational purposes only. You acknowledge that you are participating voluntarily in using our resources, and you are personally responsible for any choices, actions and outcomes now and in the future. Before making any financial or investment decisions, we recommend you consult a financial planner. Beyond The Green Coaching is not liable for any errors or omissions of information supplied in these materials.