Are you self-employed or do you have a side gig? More and more Americans today are seeing the value of developing a secondary income or working for themselves. However, without the traditional structure of an employer/employee relationship, retirement savings can be tricky.
Whether you don't have access to an employer plan at the moment or you just don't know how to leverage your extra income toward retirement, an IRA plan could be the solution you need. To help you choose the right option as an entrepreneur, here's what you need to know about the four IRA (Individual Retirement Account) options you may have available.
Traditional IRA
The most common IRA is the traditional IRA. Most American workers can open an IRA through a banking or brokerage institution of their choice. Contributions are pre-tax, meaning that what you put aside is deducted from your income before income taxes are calculated.
The traditional IRA's biggest drawbacks are contribution limitations and the lack of outside contributions. IRA accounts have the lowest annual contribution limits — $5,600 as of 2022 — but do offer catch-up contributions to those 50 and over. Moreover, because this is not an employer-sponsored plan, you usually must do all the contributing yourself.
Roth IRA
A Roth IRA operates very much like a traditional IRA with a few major exceptions. Rather than be able to deduct your contributions in the year in which you make them, you pay the income taxes on that money now. However, your investments grow and can be withdrawn in retirement without being taxed. You also do not have to take required minimum distributions (RMDs) as you do with a traditional IRA.
Although many people can open a Roth IRA on their own, it has limitations as to how much you can earn. In addition, contributions to a Roth IRA are grouped with any traditional IRA contributions when calculating the total limit of how much you can put in.
SIMPLE IRA
To aid small business owners and self-employed persons, the SIMPLE (Savings Incentive Match Plan for Employees) IRA offers an easier and less expensive alternative to employee retirement plans. You can operate one with up to 100 employees, and employees may contribute to their own accounts.
According to the IRS, the standard contribution annual limit is $14,000 in 2022. This limit is significantly higher than IRA contribution limits, but it is lower than the SEP IRA limit.
As a business owner, you will be required to make minimal contributions — usually as a match of employee contributions — to employee accounts. Nevertheless, you can make more than the minimum contribution if you want to offer an employee incentive.
Moreover, if you are the only employee, your business can make tax-deductible employer contributions to you while you make your own employee contributions, ultimately boosting your savings.
SEP IRA
Like the SIMPLE Plan, the SEP (Simplified Employee Pension) IRA is designed specifically for small businesses. With this plan, the employer makes all the contributions. However, it has the potential of much higher contribution limits. In 2022, the IRS lists this as $61,000, or 25% of the person's pay.
A SEP IRA is ideal for an entrepreneur with few or no employees and who wants to contribute a larger amount to their own retirement. You can even participate in an employer-sponsored 401(k) plan and a SEP IRA on your own at the same time, adding more to your retirement nest egg.
Where to Start
Which of these IRA options is right for you? The best way to find the best path for you is to work with an experienced financial planning service. Presidio Wealth Management can help. We provide a variety of services for clients in many financial situations. Call today to make an appointment.