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What Kind of IRA Can a Self-Employed Person Use?

MP900409255There are many options for business owners, some of which allow for more savings than a traditional IRA.

If you are self-employed or own a business where your only employee is yourself or a spouse, you can use “solo 401(k) and fund it with about 20% of your net profits when business is going great. Nice touch: you can also skip making any contributions when profits are sparse.

As Kiplinger says in the article, “Retirement Savings Plans for the Self-Employed,” whether you’re running a side business or you are entirely self-employed, you have options when it comes to saving for retirement.

You can select from several retirement plans that let you make pretax contributions that grow tax-deferred, until you withdraw the money. If you choose to make after-tax Roth contributions to your solo 401(k), withdrawals in retirement will be tax-free.

There are also some self-employed plans that let you contribute above the limits for a traditional or a Roth IRA. With a solo 401(k), for example, you can put in money both as employee and as employer.

Therefore, you could potentially contribute as much as $55,000 of your self-employment income. Some of the common plans for the self-employed are the solo 401(k), the SEP (simplified employee pension) IRA, and a SIMPLE (Savings Incentive Match Plan for Employees) IRA.

The new tax law will have an impact on retirement plans.  It may affect how you may save for retirement. For example, sole proprietors, partnerships, and other pass-through entities can now deduct 20% of their profits from their taxable income. However, the 20% pass-through deduction will be applied to the lesser of your qualified business income or taxable income minus any capital gains.

Whatever plan you and your accountant decide is best for you, bear in mind that you want to find the solution that allows you to max out retirement savings, while minimizing your tax bill. Take into consideration how much you earn and how much you can afford to save while maintaining your lifestyle, and what kind of retirement you’d like to enjoy.

Reference: Kiplinger (February 21, 2018) “Retirement Savings Plans for the Self-Employed”