Self Employed Retirement Plan Options - Denver and Colorado Springs
There are many retirement plans options available to self-employed small business owners, and it is hard to choose the one that fits you best. We have put together a summary of the most current retirement plans and when we recommend each retirement plan.
Traditional IRA/Roth IRA
This type of account is straightforward to set up and manage because it does not require payroll deductions or plan agreements. The downside is that contributions are limited, in 2019 to $6,000, with an allowable catch-up provision of $1,000 for those older than 50. A Traditional IRA/Roth IRA is a straightforward retirement plan for a small business owner with a lower net income.
This is a 401K plan set up and administered for an individual employee/owner and a spouse. The benefit of a Solo 401K is that it allows additional contributions compared to other retirement plans with a maximum contribution of $56,000 in 2019, with a possible $6,000 catch-up provision if you are 50+. To be eligible, you must be a 1099 employee or single-member LLC with no other employees besides yourself (you can have 1099 independent contractors but no direct employees). A Solo 401K is one of the most suitable retirement plans if you have a substantial net income and no employees.
This is an employer-sponsored plan available to businesses with fewer than 100 employees. A Simple IRA is typically less expensive and less complicated than a 401K plan. In 2019, the employee contribution limit is $13,000 with a $3,000 catch up provision for employees who are older than 50. Employers must either match contributions up to 3% of salary or make a flat 2% of salary contribution for every employee. A Simple IRA is one of the most appropriate retirement plans for a company with multiple hourly employees.
Many small organizations favor SEP plans because of fewer rules around the administration of the plans. Employees to be eligible must be 21 years of age, worked for the company at least three years, and make $600 a year in minimum compensation. Also, a SEP IRA allows employers to skip contributions during the years when business is down. The downside of a SEP IRA is that the employer makes all contributions instead of the employee. Contributions made by the employer cannot exceed the lesser of 25 percent of an employee's compensation, or $56,000 maximum (for 2019). This plan is one of the most suitable retirement plan options for a company with a few well-paid employees.
If you want more information about any of these plans, please reach out to us at Dodds Wealth, a financial advisory practice located in Denver, (303) 539 – 3900, and Colorado Springs, Colorado, (719) 260 - 9200. We have 20+ years of experience working with the self-employed and advising them on retirement saving and taxation issues.
Andrew T. Dodds, CFP ® - Founder and Wealth Advisor
This information was developed as a general guide to educate plan sponsors, but is not intended as authoritative guidance, tax or legal advice.