Absolutely. Whether you're a freelancer, independent contractor or a budding entrepreneur, you have access to an expanded range of retirement plans, including an
Individual 401(k) and a SEP IRA. These plans offer higher contribution limits than traditional IRAs, with tax advantages.
Retirement contribution options for small businesses |
| |
Individual 401(k) |
SEP IRA |
| Who's it for? |
Small business owners and the self-employed |
Small business owners and the self-employed |
| Who can contribute? |
Employer (you) and employee (you) |
Employer (you) |
| Maximum contribution for 2019? |
Employee contribution of up to $19,000 ($25,000 age 50+) plus employer contribution up to 25% of eligible compensation up to a combined max of $56,000 |
25% of eligible compensation to a max of $56,000 |
How does an Individual 401(k) work?
An Individual 401(k) — also known as a Solo 401(k) — is designed for business owners without W-2 employees, and it can also be used by the owner's spouse. With an Individual 401(k), you decide how much to contribute, within limits, and you can choose to contribute as your cash flow allows.
Your business can generally deduct contributions you make to an Individual 401(k) as the employer. You may also contribute as an employee, which reduces your personal taxes. Total contribution limits as employee and employer, set at $56,000 for 2019 (or $62,000 if you are over age 50 and eligible for catch-up contributions), are significantly higher than contribution limits for a traditional IRA.
Are there other types of Individual 401(k) plans?
If you decide to open an Individual 401(k), you can utilize traditional contributions, Roth contributions, or both. Perhaps the major difference between them is that traditional 401(k) contributions are made with pre-tax dollars, while Roth 401(k) contributions are made with after-tax dollars. Once a Roth account has been open for five years, you can benefit from federal income tax-free withdrawals once you reach age 59½. If traditional or Roth 401(k) assets are withdrawn prior to reaching age 59½, an additional 10% federal tax may apply to the taxable portion of the withdrawal, unless an exception applies.
What about a SEP IRA?
As a 1099 contractor, you might also consider a
Simplified Employee Pension (SEP) IRA as a retirement plan option. Contributions to individual accounts under a SEP IRA plan are generally tax-deductible by your business, and you may be able to contribute as much as $56,000 for 2019 ($55,000 for 2018, up to your 2018 tax filing date plus extension if any) or 20% of your net earnings from self-employment, if less. However, you might have the opportunity to contribute more to an Individual 401(k), through salary deferrals and employer contributions, than to a SEP IRA, which is eligible for employer contributions only and limited to 20% of your net earnings from self-employment. Be sure to consult your accountant or tax professional for advice on the contribution level and retirement account type that may be right for you.