What is a self-employed retirement plan?
- Global Wealth Management
- 2 mins
A self-employed retirement plan is a tax-deferred retirement savings program for self-employed individuals. In the past, the term "Keogh plan" or "H.R. 10 plan" was used to distinguish a retirement plan established by a self-employed individual from a plan established by a corporation or other entity. However, self-employed retirement plans are now generally referred to by the name that is used for the particular type of plan, such as SEP IRA, SIMPLE IRA, SIMPLE 401(k), or self-employed 401(k) [also known as a solo 401(k) or an individual 401(k)].
Self-employed plans can be established by any individual who is self-employed on a part-time or full-time basis, as well as by sole proprietorships and partnerships (who are considered "employees" for the purpose of participating in these plans).
Unlike IRAs, which limit tax-deductible contributions to $6,000 per year (in 2021, unchanged from 2020), self-employed plans allow you to save as much as $58,000 of your net self-employment income in 2021 (up from $57,000 in 2020), depending on the type of self-employed plan you adopt.
Contributions to a self-employed plan may be tax deductible up to certain limits. These contributions, along with any gains made on the plan investments, will accumulate tax deferred until you withdraw them.
Withdrawal rules generally mirror those of other qualified retirement plans. Distributions are taxed as ordinary income and may be subject to a 10% federal income tax penalty if taken prior to age 59½, unless an exception applies. (Special rules apply to Roth accounts and SIMPLE IRAs.) Self-employed plans can typically be rolled over to another qualified retirement plan or to an IRA. Annual minimum distributions are required after the age of 72.
You can open a self-employed plan account through banks, brokerage houses, insurance companies, mutual fund companies, and credit unions. Although the federal government sets no minimum opening balance, most institutions set their own, usually between $250 and $1,000.
The deadlines for setting up a self-employed plan and for making contributions vary by plan type.
Each tax year, you may be required to fill out Form 5500, depending on the type of plan you choose. You may need the assistance of an accountant or tax advisor, incurring extra costs.
If you earn self-employment income, a self-employed plan could be a valuable addition to your retirement strategy. And the potential payoff — a comfortable retirement — may far outweigh any extra costs or paperwork.
Cross Border Wealth is a SEC-registered investment adviser which may only transact business in those jurisdictions in which it is registered or qualifies for an exemption or exclusion from registration requirements.
Cross Border Wealth may discuss and display charts, graphs, formulas, stock, and sector picks which are not intended to be used by themselves to determine which securities to buy or sell, or when to buy or sell them. This specific information is limited and should not be used on their own to make investment decisions.
All information provided in this article is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investment, or investment strategies. Please ensure to first consult with a qualified financial adviser and or tax professional. Further, please note that while said information has been obtained from known sources which are believed to be reliable, none of these are guaranteed.