Is There a Retirement Savings Plan Tailored to the Entrepreneur?

entrepreneur retirement

We all know that we should have a retirement plan. And, this is particularly true when it comes to entrepreneurs.

Unlike working for another entity, you don’t have the luxury of perks like matching contributions. Instead, this is completely up to you to set up and fund. Despite knowing this, 34% of entrepreneurs lack a retirement plan.

According to a survey by Manta, the reasons for this include “insufficient income (37 percent), using previous savings to invest in their business (21 percent) and planning to sell their business to fund their retirement (18 percent).”

Is There a Retirement Savings Plan Tailored to the Entrepreneur?

Another excuse not included? Not being aware of a retirement plan that’s tailored to entrepreneurs.

While there isn’t one specific retirement plan for the self-employed, there are realistic ways that you can fund your retirement if you’re flying solo.

Simplified Employee Pension (SEP) IRA

Is your business structured as a sole proprietorship? If yes, then a Simplified Employee Pension (SEP-IRA) is a retirement plan that’s worth consideration.

For starters, it’s incredibly easy to set up. In fact, it’s simpler than setting up the popular solo 401(k). The reason? You only have to complete the one-page Form 5305-SEP agreement or online brokerages like Fidelity.

What’s more, annual account fees are low — if there are fees at all. It’s also a flexible plan in that you’re permitted to make contributions in a lump sum at the end of the year or skip them altogether if you like. You can make even more contributions after you’ve filed your taxes in case your income was higher than anticipated. As a result, this will lower your tax bill.

Still not sold on a SEP-IRA? Well, contribution limits are also favorable. As of 2021, you can contribute “as much as 25% of your net earnings from self-employment (not including contributions for yourself) or up to $58,000. It just depends on whichever is less.

Overall, this is a straightforward retirement plan that can help entrepreneurs that lets you put more money into your retirement savings in less time.

Savings Incentive Match Plan for Employees (SIMPLE) IRA

Although available for sole proprietors, a SIMPLE IRA is preferable for business owners who are planning to expand to 100 or fewer employees.

The easiest way to describe this retirement plan is that it’s kind of a hybrid between an IRA and a 401(k) plan. By that, I mean that you can continue investing even after you’ve hired an employee. The catch is that, according to the IRS, you’re required to make “dollar-for-dollar matching contributions, up to 3% of employee’s compensation,3 or fixed nonelective contributions of 2% of compensation.”

The major drawback of this type of plan is that contribution thresholds are on the low side. In 2021, you’re only allowed a maximum contribution of $13,500. If you’re over the age of 50, though, you can throw in an additional $3,000 to catch up.

Another con? Making early withdrawals can sting. If you do this within the first two years of the plan, you’ll be hit with a 25% penalty.

It should be noted, however, that the process of setting this plan up is similar to that of a SEP-IRA. You’ll need to either complete Form 5305-SIMPLE or Form 5304-SIMPLE. You can use do this at your bank or financial institution. Just expect the paperwork to be a tad more complicated.

Individual 401(k)

Officially called the one-participant 401(k) by the IRS, this plan goes by a number of other names, such as solo 401(k), solo-k, or uni-k. And, there’s also the most well-known title..the individual 401(k).

Arguably the most popular retirement plan for the self-employed, it’s similar to a traditional 401(k) offered by companies. The key differences are that your spouse is eligible to join the plan. And, you’re permitted to contribute as the employee and the employer.

That’s kind of a big deal if you’re looking to quickly pad your retirement account.

Here’s how that works. Acting as an employee, you can make contributions up to $19,500 or $26,000 if age 50 or older. As the boss, you can contribute “up to an additional 25% of your net earnings from self-employment for total contributions of $58,000” in 2021.

Another benefit of this plan is that there aren’t restrictions on those contributions. That means if the business is slow, you can make them up when it’s booming in order to catch up. There are also tax breaks for your contributions. And, if you’re married, there’s a chance that you can double up on contributions as well.

Keep in mind that this plan is not available to any additional employees. So, it’s more geared towards sole proprietors. If you fit that bill, you’ll need to work with a financial institution to set the plan up.

Are There Any Other Ways Entrepreneurs Can Build Their Own Retirement Plans?

While the three plans listed above are the most common ways to fund your retirement if you’re an entrepreneur, there are additional alternatives as well.

For instance, the IRS states that there are the following defined contribution plans;

  • Profit-sharing plan. Formerly known as a Keogh Plan, this is a qualified or profit-sharing plan that “allows you to decide how much to contribute on an annual basis, up to 25% of compensation (not including contributions for yourself) or $58,000 for 2021 ($57,000 for 2020 and $56,000 for 2019).”
  • Money purchase plan: Here, you’re required “to contribute a fixed percentage of your income every year, up to 25% of compensation (not including contributions for yourself), according to a formula stated in the plan.”

There’s also Social Security. It “really isn’t much different whether you’re self-employed or work for someone else,” explains Amy Fontinelle for Investopedia. “Self-employed individuals earn Social Security work credits the same way employees do and qualify for benefits based on their work credits and earnings.”

Furthermore, as long as you have employment income, anyone can open a Roth or Traditional IRA. In 2021, the maximum annual contribution is $6,000 or your total earned income — it’s whatever is less. If you’re age 50 or older, this jumps up to $7,000.

If you’re in need of even more retirement plan options, consider;

  • Rolling over a 401(k), 403(b), or 457(b) if you had these types of plans with a former employer.
  • Opening a health savings account (HSA) to cover future medical expenses.
  • Investing in real estate. “Real estate investing is one retirement savings option for the self-employed looking for longer-term results,” writes Kayla Sloan in a previous Due article. REITs provide a steady income and diversify your investments.

Prepare for Your Retirement Today

Even if you love what you’re doing and retirement is still decades away, if you want to enjoy your Golden Years, then you need to make a retirement plan today.

Choosing the right plan is your first step. As you can see, you have a variety of options. Ultimately, it depends on your exact business structure and retirement goals. While I’m sure that you can determine this on you’re own, put your ego aside and work with an advisor who can steer you in the right direction.

After that, take stock of lifestyle changes and what type of retirement you wish to have. There’s a huge difference between selling your multimillion-dollar business and jet setting the world to living a modest post-work life so that you can see your grandkids — and occasionally help out with the family business.

Conclusion

Regardless of what your ideal retirement looks like, help boost your retirement by having a diversified portfolio, being a master budgeter, and living below your means.

What if you’re banking on selling your business? Make sure that you take the appropriate steps to make it attractive to potential buyers. This includes cleaning up your books, documenting your business systems, and having a growth plan.

John Rampton

John Rampton

John Rampton is an entrepreneur and connector. When he was 23 years old while attending the University of Utah he was hurt in a construction accident. His leg was snapped in half. He was told by 13 doctors he would never walk again. Over the next 12 months he had several surgeries, stem cell injections and learned how to walk again. During this time he studied and mastered how to make money work for you, not against you. He has since taught thousands through books, courses and written over 5000 articles online about finance, entrepreneurship and productivity. He has been recognized as the Top Online Influencers in the World by Entrepreneur Magazine, Finance Expert by Time and Annuity Expert by Nasdaq. He is the Founder and CEO of Due.

About Due

Due makes it easier to retire on your terms. We give you a realistic view on exactly where you’re at financially so when you retire you know how much money you’ll get each month. Get started today.