Today’s question comes from Amy from Grand Rapids, MI…
“Hi, Matt and Joel. I have a question about retirement accounts for those of us who are self employed.
My husband and I are in Money Gear #7 and we feel pretty good about our finances overall. But we also feel a little bit behind in saving for retirement.
When we got married seven years ago, we had $125k worth of student loans. We hated being in debt, so we did everything we could to pay that off as quickly as possible and ended up paying it off in less than three years, which we’re really proud of.
But that choice stopped us from really aggressively saving for retirement during those years, and we’re playing catch up now.
Both of us are self employed. My husband does not have any employees in his business, which is separate from mine. By the way, I have several full time employees in my business, and we’re wondering, in addition to our Roth IRAs and our HSA, which we max out every year, what retirement accounts should we look into opening as self employed people? Thanks in advance for your help!”
Matt & Joel’s Reponse:
Congrats on getting those student loans out of your life, Amy! You should be proud of that.
And you guys are maxing out Roth IRAs and HSAs. That’s really incredible.
I wouldn’t even call it “playing catch-up”, because it sounds like you’re doing all the right things.
But yes, there’s more you can do! And as a small business owner it’s actually easier to make up for that lost time fairly easily, thanks to more generous contribution limits on small-business-specific accounts.
Here are some options to look into…
Open a Solo 401k
For your husband’s business, as a self-employed fella with no employees, he is the perfect candidate for a Solo 401k.
Solo 401k’s come with 2 contribution limits. First, you have the typical employee 401k contribution limit, which is $23,000 for year 2024.
But then in addition to that he can contribute to his solo 401k as the employer. This is limited to 25% of his gross wages, or his W2 income.
Together, that means it’s possible to hurl $69k into that account if he decides to max out both!
They’re also not that hard to set up. Fidelity, Schwab, and ETrade offer solid Solo 401ks options. Vanguard recently sold their solo 401k portfolio of products to a company called Ascensus.
We have solo 401ks here at How To Money, because we’re the only full time employees. If we were to hire one other person as a full time employee, we would no longer have this at our disposal. But we think this account makes a whole lot of sense for your husband too.
Solo *Roth* 401k
Another cool thing about opening a Solo 401k is you can also choose a Solo *Roth* 401k!
If you’re ok paying taxes on those earnings upfront, sticking money into a Roth 401k means not paying any taxes later in life. Roth 401ks work just like Roth IRAs, except you get the benefit of the higher contribution limit!
Not all providers offer this Solo Roth 401k option though. I know Ascensus does and ETrade does too. Check out this thorough review from our buddy Robert about choosing a provider.
Since a solo 401k can rollover directly to a Roth IRA, this is a huge advantage to quickly boost your Roth account balance.
SEP IRA
For you, Amy, since you have employees, you have to decide whether or not you want to offer them access to a retirement account or not.
It could be a great benefit to offer and help you retain talent… if you can afford it.
If so, the SEP IRA is a great vehicle for that.
SEP stands for Simplified Employee Pension. It’s a type of retirement account you set up for each employee, and yourself too.
They have higher contribution limits than regular IRAs. It’s either 25% of total compensation, with a maximum limit of $69,000.
But read the fine print! You have to contribute the same percentage for each employee. That could get expensive really quickly.
Thanks to the SECURE act a few years back, there could be some tax credit for you as the business owner to set up SEP IRAs for your employees. Might be worth looking into.
Small business benefits package
Another option for your business with employees is to set up full fledged traditional 401ks for everyone.
This used to be hard to pull off (and expensive) as a small business owner. But now it’s relatively easy thanks to companies like Guideline, Betterment & Human Interest.
You might be able to set a plan up for around $2k a year, which actually isn’t awful!
It puts retirement savings in the hands of your employees, and each individual can decide what they’d like to contribute. You could also offer a match if you wanted. More small businesses should at least consider going this route in a highly competitive employment environment.
The Bottom Line:
Small business owners (including self-employed contractors and freelancers) often think that they’re at a disadvantage when it comes to saving for retirement, but they also have some serious perks when it comes to retirement savings. Especially if you’re inclined to invest quite a bit in tax-advantaged ways.
Solo 401ks are easy to set up, have no or low fees, and let you sock away massive amounts thanks to higher contribution limits. SEP IRAs are a great option, too. Although be prepared to read through all the rules and red tape.
Lastly, hiring a company to manage your workplace benefits could be a really great choice. Not only will you be able to participate, but you can offer a better package to your employees!
Cheers for the question Amy, and good luck!
For the full version of this discussion, check out Podcast Episode #892 (it’s the 3rd question in the episode)
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