Curated by: Rubric Advisors
Retirement Planning
Solo 401(k) & Self-Employed Retirement Plans
Self-employed tech professionals, contractors, consultants, and business owners, have access to powerful retirement plans that can shelter significantly more income than a standard IRA, but each plan type has different contribution limits and trade-offs.
Solo 401(k) & Self-Employed Retirement Plans
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Solo 401(k) Overview
- Available to self-employed individuals with no full-time employees (spouse can participate)
- Employee deferrals up to the 402(g) limit plus employer profit-sharing up to 25% of net self-employment income
- Total contributions can reach the 415(c) annual additions limit (check IRS.gov for current year limits)
- Roth option available for employee deferrals, grow self-employed income tax-free
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Full Guide
Solo 401(k) Overview
- Available to self-employed individuals with no full-time employees (spouse can participate)
- Employee deferrals up to the 402(g) limit plus employer profit-sharing up to 25% of net self-employment income
- Total contributions can reach the 415(c) annual additions limit (check IRS.gov for current year limits)
- Roth option available for employee deferrals, grow self-employed income tax-free
SEP IRA: Simple High-Limit Option
- Employer-only contributions up to 25% of net self-employment income (up to the annual limit)
- No employee deferral component, all contributions come from the business side
- Very simple to set up and administer, no annual IRS filings required below the reporting threshold
- Caution: if you have employees, you must contribute the same percentage for all eligible employees
SIMPLE IRA for Small Businesses
- Available to businesses with 100 or fewer employees, useful as the business grows
- Employee deferrals up to the annual SIMPLE limit + mandatory employer match (up to 3%) or 2% non-elective
- Lower contribution limits than Solo 401(k) or SEP, best for moderate-income self-employment
- Two-year waiting period before rolling SIMPLE IRA funds to another plan type without penalty
Defined Benefit / Cash Balance Plans
- Can shelter dramatically more income, potentially $200K-$300K+ per year depending on age and income
- Contributions are based on actuarial calculations targeting a specific retirement benefit
- Best suited for high-earning self-employed professionals over age 40 with consistent income
- Higher setup and administration costs ($2,000-$5,000+ annually), requires an enrolled actuary
Choosing the Right Plan
- Solo 401(k) is the most flexible option for most self-employed individuals, highest limits with Roth option
- SEP IRA is simplest if you want employer-only contributions and have no employees
- Defined benefit plan is optimal for high earners over 40 who want to maximize tax-deferred savings
- Plans can be combined, a Solo 401(k) paired with a defined benefit plan maximizes total contributions
Key Takeaways
- Self-employed retirement plans can shelter far more than the standard IRA contribution limit
- Solo 401(k) offers the best combination of high limits, Roth option, and flexibility for most sole proprietors
- High earners over 40 should evaluate defined benefit plans for substantially higher contribution capacity
- Consult a financial advisor to determine the optimal plan structure based on your income, age, and goals
Related Topics
SEP IRA and SIMPLE IRA, Retirement Plans for Small Businesses
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Retirement Planning401(k) Withdrawal Rules
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