How to save for retirement when you're self-employed and cut your tax bills along the way.
Are you newly self-employed after joining the Great Resignation? Welcome aboard. Given your new status, you need to know about your tax-favored retirement plan options.
Key point: Self-employed means being a sole proprietor, the sole owner of a single-member limited liability company that’s treated as a sole proprietorship for tax purposes, a partner, or a member of a multi-member LLC that’s treated as a partnership for tax purposes. If you meet one of those descriptions, this column is aimed at you. Read on.
Combined contribution limits For the 2022 tax year, the combined elective deferral and employer contributions cannot exceed: $61,000 or $67,500 if you’ll be age 50 or older as of 12/31/22 or 100% of your net SE income. Net SE income equals the net profit shown on Schedule C, E, or F for the business in question minus the deduction for 50% of self-employment tax attributable to that business.
Solo 401 pros * For one-person business owners who hate to leave any tax break on the table, the solo 401 option is a sweet deal. Many owners will be able to make much larger annual deductible contributions to solo 401s than to a SEP or SIMPLE-IRA. * If your business has one or more employees, the tax rules may require you to make 401 contributions for those employees. If so, we obviously won’t have a solo 401 plan. Instead, we will have a garden variety multi-participant 401 plan with the resulting complications. However, you can exclude employees who are under age 21 and employees who have not worked at least 1,000 hours during any 12-month period from 401 plan coverage.
The defined-benefit pension plan option A defined-benefit pension plan is designed to deliver a target level of annual payouts from your retirement account after you reach a stipulated retirement age. You make annual deductible contributions to fund the target payout. The amount contributed each year must be calculated by an actuary.
Defined-benefit plan cons * While making big tax-saving contributions might sound like a great idea, making truly huge contributions might not be affordable unless you have tons of liquid assets laying around.
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