October 17, 2017|
At one time, pension plans and other qualified retirement plans were usually offered only by larger companies, but now, many small companies have caught up. In fact, if you are self-employed with just one or two employees—or maybe just yourself—you still have plenty of retirement plan options at your disposal. Here are four popular choices for self-employed business owners.
1. SEPs: A self-employed individual may adopt a Simplified Employee Pension (SEP) plan, set up in a form similar to a traditional IRA. All other employees must be covered. You generally contribute to the plan based on a percentage of compensation, up to the tax law limits, although annual contributions are not required. For 2017, deductible SEP contributions cannot exceed the lesser of 25% of the employee’s compensation or $54,000. As with all qualified plans, the maximum compensation taken into account in 2017 is limited to $270,000. (Limits for qualified plans in 2018 will be announced shortly.)
2. SIMPLEs: A Savings Incentive Match Plan for Employees (SIMPLE) is available only to a business with 100 or fewer employees and no other retirement plan. You must make a matching contribution equal to a certain portion or percentage of an employee’s contribution or a minimum non-elective contribution for all plan participants. With a SIMPLE, you can use an IRA or 401(k) version. For 2017, you can contribute up to $12,500 to a SIMPLE ($15,500 if age 50 or older). As a further enticement, you do not have to file an annual return for the plan.
3. Solo 401(k) plans: This plan may cover a business owner having no other employees (not counting your spouse). Generally, the rules and requirements for traditional 401(k)s apply. For instance, a self-employed individual can defer up to $18,000 in 2017 ($24,000 if age 50 or older), while overall deductible contributions for this defined contribution plan, including matching contributions, cannot exceed the lesser of 25% of compensation or $54,000 ($60,000 if age 50 or older). Key advantage: Because the percentage part of the annual contribution limit does not apply to solo 401(k)s, this vehicle may be preferable to others.
4. Keogh plans: This plan was designed to be the main qualified retirement plan for self-employed individuals and is considered a relic of the past by some, but it is still kicking around. There are two main types: defined contribution Keoghs and defined benefit Keoghs. The basic rules for these types of plans apply, but with a twist: The annual contribution limit is based on “earned income” instead of “compensation” and thus effectively reduces the percentage cap for self-employed individuals. In contrast to defined contribution plans, a defined benefit plan in 2017 may provide an annual retirement benefit equal to the lesser of 100% of earned income for the three highest-paid years or $215,000.
When choosing a plan for your business, investigate all the possibilities. Then you can make a well-informed decision that is suitable for your situation.