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Retirement Options for a One-Participant Plan

If you are self-employed without employees and are looking into putting money away for retirement, there are several popular options outside of the Traditional or Roth IRA plans.

Three of the more popular retirement plans include Self Employed Pensions (SEP) IRA, Simple IRA, and One-Person 401(k)

Self Employed Pension (SEP) IRA

A SEP IRA allows a self-employed individual to make contributions for all eligible employees or just make contributions to his own plan if he has no employees. The contribution limit for the self-employed individual is 25% of the net self-employment income, up to $53,000 in 2016.  There is a 10% penalty for early withdrawal.

SEP IRA plans are popular among self-employed individuals for several reasons:

  • easy to set up and maintain
  • higher maximum contributions than traditional IRAs
  • no reporting requirements
  • do not require a recurring contribution
  • allow participants (who are 100% vested) to decide how funds are invested
  • contributions are tax deductible for contributors and tax deferred for participants
  • deductible contributions are allowed past age 70.5

Simple IRA

SIMPLE IRA plans are available for employers with 100 or fewer employees who do not have other retirement plans. The contribution limit is $12,500 for those under age 50, and $15,500 for those over the age of 50. Employers can either match dollar-for-dollar up to 3% of employee wages or contribute 2% of wages for all participants for wages up to $265,000. The penalty for early withdrawal is 25% of the distribution if taken out within the first two years the plan is set up and 10% after.

Similar to SEP plans, SIMPLE IRAs are a popular option for self-employed individuals for their easy setup and maintenance, tax deductions and deferrals, deductible contributions past age 70.5, and allowing participants (also 100% vested) to choose how their money is invested. SIMPLE plans are also similar to traditional 401(k) plans, but without nondiscrimination policies.

One-Person 401(k)

In a one-person 401(k) plan, otherwise known as a “solo 401(k) plan”, participants can contribute up to 100% of the participant’s compensation or $53,000 for those under age 50, and $59,000 for those over the age of 50, and thus are a good option for self-employed individuals with no employees who want to maximize their contributions.  Benefits of a one-person 401(k) plan over a SEP IRA plan include the ability to make deferrals up to $18,000 ($24,000 if over age 50), and the ability to include a Roth component within the plan.

Please contact Wegner CPAs if you would like to discuss these options as they relate to your self-employed business.

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