Retirement Plans for Self-Employed People

As America’s work environment continues to evolve, one thing that has become evident is that — in many cases — the work-from-home (WFH) model has proved to be effective and even cost-efficient. However, many companies with significant investments in their office buildings and campuses are not likely to want their employees to keep working from home permanently. For workers who do not want to comply with return-to-office mandates, there may be a solution: Work with your employer to transition into an independent contractor.

At the end of 2021, the National Labor Relations Board announced it will consider revamping the current legal standard for determining whether workers are independent contractors or employees.¹ Presently, many companies classify workers as independent contractors but still control much of the way they conduct their jobs. Yet they don’t provide the benefits of a full-time worker. As these standards begin to change, it may become more beneficial for independent contractors, especially if they establish their own benefits through an effective pricing model.

In 2020, the number of sole proprietorships grew, and business analysts predict this trend will likely continue.² There are about 57 million “gig workers” in the U.S., with projections that they may represent up to half of the U.S. workforce by 2023.³

One of the drawbacks of working for yourself is not having access to a 401(k) plan and company match. However, there are plenty of options for self-employed folks. One of the elements of transitioning to independent contractor status is increasing your hourly wage. For example, if your current salary averages out to $30 an hour, you’ll want to charge around $50 an hour or more to cover your expenses, such as equipment, health and life insurance, and a retirement plan. If you’d like to discuss the various retirement plans available to self-employed individuals, please contact us. In the meantime, we’ve outlined various plans below.

SEP

With a Simplified Employee Pension, you may contribute as much as 25% of your net earnings, up to $61,000, in 2022. You can set up a SEP plan as late as the due date of your income tax return for that year (including extensions).⁴

Individual 401(k) Plan

With an individual 401(k) — also referred to as a solo 401(k) — you can take advantage of a much higher employer match, as long as your business has the revenues. In 2022, a self-employed person may contribute up to $20,500, plus an additional $6,500 for those age 50 or older. The kicker is that you also may contribute up to an additional 25% of your business’s net earnings — for a total contribution of $61,000.⁵

SIMPLE IRA

With a Savings Incentive Match Plan for Employees, you may contribute up to $14,000 (in 2022), an additional $3,000 if you’re 50 or older, plus either a 2% fixed contribution or a 3% matching contribution.⁶ 

Traditional IRA

A traditional IRA allows fully or partially deductible contributions depending on your filing status and income. Traditional IRA investments are not taxed until withdrawn. If withdrawn before age 59½, the owner may be subject to a 10% penalty as well as regular income taxes.⁷

Roth IRA

While Roth IRA contributions are not deductible, qualified distributions are tax-free. Other features include the ability to make contributions after age 70½ and no annual required minimum distributions after age 72.⁸

For tax years 2021 and 2022, the total contribution you can make to all of your IRAs combined is capped at $6,000 ($7,000 if you’re age 50 or older), or your taxable compensation for the year (if less).

Interested in exploring your options? We’re here for you! Click here to schedule a complimentary 15-minute strategy call with one of our advisors.

¹ Fisher Phillips. Jan. 3, 2022. “Unhappy New Year for Gig Economy Companies? Labor Board Will Reconsider Independent Contractor Standard in 2022.” https://www.fisherphillips.com/news-insights/gig-economy-companies-labor-board-independent-contractor-2022.html. Accessed Jan. 17, 2022.

² Tyler Gallagher. Forbes. Jan. 12, 2022. “Entrepreneurship Forecast For 2022: Stats, Trends And Analysis.” https://www.forbes.com/sites/theyec/2022/01/12/entrepreneurship-forecast-for-2022-stats-trends-and-analysis/. Accessed Jan. 17, 2022.

³ Nasdaq. Jan. 12, 2022. “Gig Economy Retirement Planning.” https://www.nasdaq.com/articles/gig-economy-retirement-planning. Accessed Jan. 17, 2022.

⁴ IRS. Nov. 15, 2021. “Retirement Plans for Self-Employed People.” https://www.irs.gov/retirement-plans/retirement-plans-for-self-employed-people. Accessed Jan. 17, 2022.

⁵ Ibid.

⁶ Ibid.

⁷ IRS. Jan. 3, 2022. “Traditional IRAs.” https://www.irs.gov/retirement-plans/traditional-iras. Accessed Jan. 17, 2022.

⁸ IRS. Nov. 5, 2021. “Roth IRAs.” https://www.irs.gov/retirement-plans/roth-iras. Accessed Jan. 17, 2022.

We are an independent firm helping individuals create retirement strategies using a variety of insurance and investment products to custom suit their needs and objectives. This material is intended to provide general information to help you understand basic financial planning strategies and should not be construed as financial or investment advice. All investments are subject to risk including the potential loss of principal. No investment strategy can guarantee a profit or protect against loss in periods of declining values.

The information contained in this material is believed to be reliable, but accuracy and completeness cannot be guaranteed; it is not intended to be used as the sole basis for financial decisions.