Plans dedicated to sole proprietors offer flexibility employee plans don’t
More of us are working for ourselves these days. According to the Bureau of Labor Statistics, as of July, 16 million Americans were self-employed and nearly 80% of them didn’t have other people working for them.
As an employee, your choices pretty boil down to a traditional individual retirement account , a nondeductible Roth IRA, and an employer-sponsored 401 plan. But there are income and contribution limits for both traditional and Roth IRA accounts, especially if you or your spouse are covered by a workplace 401 plan.
1. SIMPLE IRAs. These plans allow owners or employees of small businesses to contribute to traditional IRAs. They are, in a way, 401s Lite, because they are easier and less costly to set up, although employers are required to make a 3% match for employee contributions. The rules are the same as traditional IRAs for salary deductions, tax-deferred accrual over the years, and distributions, but in 2020 the maximum contribution for participants over 50 will be $16,500, far less than a 401.
One potential drawback: If you have employees, all must get the same percentage contribution, and there are no over-50 catchup contributions. But whatever the ultimate number, $57,000 is a lot of money to sock away—if you can afford to. The limit on that total is, again, the same $285,000 maximum for the SEP-IRA, but you can stash away more. Not only can you put in the same maximum $57,000 you can with a SEP-IRA; if you’re over 50, in 2020 you can add a catch-up contribution of $6,500, too, for a grand total of $63,500.
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