• Marie-Yves Nadine Jean-Baptiste

Self-Employed IRA and 401(K)

Updated: Jul 20, 2021

For those of you who are self-employed or a business owner this article will help you figure out how to set up a Simplified Employee Pension Individual Retirement Account (SEP IRA) and a self-employed 401(k) plan. Usually, when you’re working for an employer, you can count on having a 401(k) plan or something similar already in place to help. It is a different story though, when you are working for yourself. Since you are your own boss, you are both responsible for starting and funding your own plan.

These plans help self-employed individuals and small-business owners get access to a tax-deferred benefit when saving for retirement. Self-employed individuals, owner-only businesses, and partnerships can save more for retirement through an SEP IRA and/or 401(k) plan designed especially for them.

You can set up an SEP IRA by contacting a financial institution that offers this specific product. You must do this for every individual employed by your organization. Each organization has their specific way of opening such an account. It is advisable that you speak to a qualified representative to help you set this up.

The SEP IRA is limited to an annual contribution of the smaller of $56,000 or 25% of compensation of the first $280,000.00 yearly salary (based on 2019 numbers). Contributions must be made in cash; you cannot contribute property. If employed as a W-2 employee with another organization, you are allowed to make contributions to a traditional IRA, but your contributions limited to $19,000.00 per year for 2019. The key issue being that your SEP and your W-2 plans must not be with two different companies that are not under common control.

If you determine that a self-employed 401(k) plan is a good match for you, you can establish one by preparing plan documents and disclosures, open the account with a financial institution of your choice, and make contributions. This plan is only limited to the business owner and potentially their spouse. If you have full time employees that qualify for another type of 401 (k) plan, the business is not eligible for participation in the self-employed 401 (k) plan.

You can contribute to the plan in two ways: as an employee of the business and as the owner of the business. As an employee, you are limited to $19,000.00 in 2019 (indexed for inflation) and as an employee, you are limited to contributing up to 25% of your annual salary with a maximum of $55,000.00 in 2019 (indexed for inflation). If you are over 50 years old, you can add an additional $6,000.00 in contributions. There is also the added bonus of a tax break whether your business is incorporated or not. If incorporated, then you deduct the contributions from your personal income, if not, then you deduct them as a business expense.

Whichever plans you choose — whether it’s a 401(k) SEP IRA or another form of retirement savings program — make sure that you speak to a qualified representative at an organization of your choice.


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