In our last post, we discussed a report produced by the U.S Bureau of Labor Statistics that showed that in March of 2020 (when they conducted the survey), 33% of those surveyed did not have access to any workplace retirement plan. This could be because their employer didn’t offer one, they weren’t eligible to participate in the company workplace plan, or they were self-employed. If you find that you don’t have access to a workplace plan or are self-employed, there are other ways to potentially save for retirement. In our last post, we specifically reviewed traditional and Roth IRAs as potential options. In this post, we’ll explore a few other types of accounts to consider.
You’re Self-Employed and Don’t Have Employees (Or Maybe Just a Few)
If you are self-employed and don’t have any employees, there are a few account types you could consider to save for retirement. The first would be a SEP IRA. If you are a sole proprietor or run your business as a partnership, C-corp, or S-corp, you may be eligible to establish a SEP IRA. What’s nice about SEPs are that they are generally easy to set up and maintain and they generally don’t require IRS reporting by the employer as some other plan types do. SEPs offer the potential to contribute more per year than a traditional or Roth IRA and contributions are completely discretionary. In 2021, the maximum contribution to a SEP is the lesser of 25% of the employee’s compensation for the year or $58,000. The actual formula of what is considered “compensation” and what the maximum percentage contribution allowed given your individual situation can be complex. We would encourage you to work with a tax advisor to determine how much you may be able to contribute annually to a SEP IRA.
While SEPs are a good option for self-employed people to consider if they don’t have employees, you can have a business that does have employees and have a SEP IRA. There are a few considerations though. One is that you as the employer, are responsible for contributions to SEP IRAs established for employees (employees don’t contribute themselves). You also are required to contribute an equal percentage of eligible compensation to your eligible employee’s SEP IRA accounts as you do to your own SEP IRA.
SEPs do allow for you to impose eligibility requirements for employees. The minimum criteria the IRS uses to determine who is an eligible employee and must be included in the SEP plan are: 1) they must be age 21 and older, 2) worked for your business for the last 3 out of 5 years, and 3) received at least $650 in wages in 2021. Even though the IRS allows for some employees to be excluded from a SEP plan, if you run a business with many long tenured employees, you may find it burdensome to fund your own SEP IRA and make required contributions to eligible employee’s SEP IRAs as well.
If you are self-employed and truly have no employees (other than maybe your spouse), you could consider an individual 401(k) (also known as a solo 401(k)). The rules around solo 401(k)s are a little more complicated, but on a general level, they may be a good fit for someone looking to potentially save more than they may be able to with a SEP IRA. They also can be customized to have certain features that aren’t available with SEP IRAs like Roth contributions and the ability to take loans. There are a few things to consider. After an individual 401(k) plan reaches more than $250,000 in assets, then you will be subject to annual required tax filings. Also, if you participate in a 401(k) plan through another employer and have an individual 401(k) for your self-employment income, your contributions may be limited. A financial or tax advisor can discuss the overall contribution limits and nuances that may be applicable to your individual situation.
You Aren’t Self-Employed
If you fall into the category that you’re an employee of an employer that a) doesn’t have a workplace retirement plan or b) you aren’t eligible to participate in the plan they do offer, there are options for you to save. The first option is to consider contributing to a traditional or Roth IRA (which we discussed in detail in last our last blog post). Again, you don’t need to be tied to an employer to contribute, you just need earned income (i.e. wages, salary, bonuses, etc.). If you have maximized your contributions to a traditional or Roth IRA and are still looking to save, you could also consider contributing to a taxable brokerage account. There are no tax benefits associated with this type of account. Contributions are made on an after-tax basis and the account doesn’t grow tax deferred (you’ll need to report activity that happens in the account like dividends, interest, and capital gains annually on your tax return). However, if you are looking to be diligent about saving on a regular basis and have maximized contributions to retirement accounts that are available to you, a taxable brokerage account is an option to consider.
Whichever retirement vehicles you use, the key thing to keep in mind is that one of the most important elements is time. So, the sooner you can start, the more opportunity you have to potentially grow those assets to the point that they can be a significant part of your retirement cash flow. It’s never too late to start. But starting as early as you can is an advantage. Whether you use tax advantaged IRAs, Roth IRAs, SEP IRAs, individual (solo) 401(k)s, or regular taxable brokerage accounts, or a combination of any of them, the key is to be consistent with your contributions and realistic in your return expectations. If you start early, it truly is long term investing.
Securities and Advisory Services offered through LPL Financial, member FINRA/SIPC, a Registered Investment Advisor. LPL Financial and Croxall Capital Planning do not provide tax or legal advice. The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.