Retirement Planning Tips for Self-Employed Individuals

If you’re a self-employed individual, you have more control over your retirement planning than those with regular, W-2 employment income. However, very few business owners are set up properly and know the best ways to save for the future. In this article, we’ll share the top accounts and strategies for recommended business-owners planning for retirement. These are the real strategies we, at REAP Financial, help our clients use to get the most out of their retirement.

Self-Employed & Business Owners: Looking Towards Retirement

At REAP Financial, we work with a lot of families who retire, but then go back into business for themselves. Whether this be a consulting business, LLC, or sole proprietorship, many retirees set up an independent business to help transition themselves out of working full time. On the other hand, we work with many clients who are business owners, work for themselves, and aren’t fully retired either. 

Often, for business owners and self-employed individuals, you may be overpaying in taxes, because you started out small and didn’t adjust correctly as the business grew. When it comes to retirement planning options, self-employed individuals have a lot more options on the table versus a typical W-2 employee. At REAP Financial, we want to make sure you get the most out of your retirement. In this article, we’ll dive into the top strategies that successful business owners save today for a successful retirement future. 

Solo 401K

First on our list is the solo 401k. A solo 401k can be established quite easily, although there are some planned documents that need to be submitted by an attorney or custodian. A solo 401k allows you to put in a substantial amount of money compared to a regular 401k. While you can set up a regular 401k, either Roth or traditional, if your business has only a few employees, it may not be worth it. That is why the solo 401k can be so useful; it is relatively simple to set up. 

The solo 401k is also great, since the contributions can be much higher. In 2024, the maximum you can put in a regular 401k is $23,000. However, in a solo 401k, the maximum is $69,000. Plus, if you’re over 50, you can put in an additional, catch-up contribution of $7,500. If you’re a high earner, this is a great account for you, since it will allow you to contribute more to your 401k overall. 

SEP IRA

Also known as a Simplified Employee Pension, the SEP IRA is a retirement account reserved for self-employed people and business owners. Much like the Solo 401k, the SEP IRA can be set up pretty easily. It is quite flexible, and you can invest your money in a large array of assets. The contribution limits on a SEP IRA is quite high as well, reaching a maximum of $69,000. Notably, for this account, your contribution cannot account for more than 25% of your net income. 

The other nice thing about the SEP IRA is that you can also access a SEP Roth IRA, as of 2024. This allows you to get a lot of money into a Roth account. The key difference between a SEP IRA and the Solo 401k is the catch-up contribution. There are no catch-up contributions allowed on SEP IRAs, so if you’re trying to build up your balance quickly, a SEP IRA may not be the right choice for you. 

Traditional IRA and Roth IRA

Don’t forget you also have access to traditional IRAs and Roth IRAs! These accounts have a maximum contribution of $7,000 per year or $8,000, if you’re above the age of 50. They won’t be tied to your business or entity, but to you personally. 

One question we get a lot is whether you can contribute to these traditional accounts alongside a SEP IRA. You can contribute to both, as long as your income does not exceed certain limits. Although there are some income limitations, most business owners can leverage both types of account. This is especially powerful if you’re contributing to two Roth accounts, which are taxed upfront and grow tax-free. 

Simple IRA

Another option is the Simple IRA. This can be a good choice for business owners or self-employed individuals who are earning less income than the levels in the previously-mentioned account types, but who still want to contribute more than the traditional IRA. The Simple IRA is tied to your business and allows you to put in up to $16,000 every year or $19,500 if you’re over 50. The rules for getting money out of a Simple IRA are similar to a traditional IRA or SEP IRA. 

We find this is generally a good option for businesses with 1 – 10 employees and you’re wanting to get money into those accounts. There are some lower contribution limits on those for the employer-side, which can enable easier scaling. Plus, the Simple IRA still allows you to attract good talent to your business and offer employees a retirement account. 

Keogh Plan

Of all the options mentioned, the Keogh Plan is the least well-known. This plan allows you to contribute a maximum of $69,000 in a given year. The Keogh Plan is best suited for an executive or high-earning, self-employed business owner, since you can set up a Keogh Plan as a defined benefit plan. When set up correctly as such, you can put up to $275,000 into the account in 2024. It is the largest contribution limit available in the self-employment retirement account sphere. As opposed to some other options, Keogh plans can be very complicated. They tend to require a 3rd party administrator, which brings its own costs throughout the year as well. 

As you can see, there are several options available to you, if you’re a self-employed person or business owner planning for retirement. You’ll select the best plan for you, based on your income, how much you can reasonably save, and more. You can even modulate your plan over the years, as your income grows and business changes. 

HSA

Also known as a Health Savings Account, the HSA is generally thought to be reserved only for medical expenses. However, it can be a powerful account for tax-free retirement income down the road. To qualify for an HSA, you have to have a high-deductible health insurance plan (deductible of $1,600 for a single-filer or $3,000 for a family). If you qualify, you can open an account with a major custodian and invest money in them. This money then grows tax-deferred and potentially be drawn out tax-free. 

Often, we refer to the HSA as a Super Roth because contributing to an HSA gives you a tax deduction, your contributions can grow tax-free, and it can potentially be taken out in retirement tax-free if used for qualified medical expenses. In 2024, you can contribute a maximum of $4,150 for a single-filer or $8,300 for joint-filers. Remember, you can couple an HSA with any of the other accounts listed above. We encourage our clients to stockpile their HSA and then pay for any qualifying medical expenses out of pocket, not out of their HSA. If you keep track of all of these expenses for you and your family, you can retroactively reimburse yourself for all of those expenses in retirement. 

Picking the Right Retirement Strategies

The most difficult piece of the puzzle is determining which account or series of accounts is right for you, your employees, and your business, as well as your future growth. At REAP Financial, we can help you review all your options and find the best one for you in a one-on-one consultation with our fiduciary advisors. In just 60 minutes, we can identify the best strategy for you and your family. If you’re ready to schedule your consultation, send us an email at retire@reapfinancial.com to start the process!

Achieve Optimal Retirement Success with REAP Financial

As you plan for retirement, it’s crucial to consider a broad spectrum of investment opportunities. At REAP Financial, we understand the pitfalls of investing all your funds in a single account type—like potential tax inefficiencies and reduced returns. That’s why we advocate for diversifying your retirement accounts. To explore more advanced strategies, such as using your IRA to fund an HSA, check out our website or YouTube channel for additional valuable insights.

If you’re in the Austin, Texas area and looking for expert retirement planning advice, contact our skilled team at REAP Financial. We specialize in creating customized retirement strategies that align with your unique financial goals and lifestyle aspirations. Let us help you navigate the complexities of retirement planning for a secure and fulfilling future. Reach out today for a consultation and start your journey toward a comfortable retirement.

Give us a call: (512) 249-7300

Our Main Office Address

REAP Financial

9414 Anderson Mill Rd #100

Austin, TX 78729

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