Are You A Sole Proprietor: The Three S’s For Retirement

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Are You A Sole Proprietor: The Three S’s For Retirement


How To Crush Your Debt In 2019

January 06, 2019

In today’s ‘gig economy’ more and more individuals are picking up some sort of side hustle to improve their financial situation.  Along with that trend, people in their mid 50’s are stepping away from their corporate jobs in the search of freedom and flexibility to start their own consulting LLC’s.  This new plethora of part time and full-time entrepreneurs leaves a maze of dizzying choices on what kind of potential retirement plan is available when you own a brand new business. One easy way to remember what kinds of retirement plans are available to you is to remember the three S’s of retirement which are SIMPLE IRA plans, a SEP IRA plans, and a Solo 401(k) plans.


The SIMPLE IRA Plan is a simple, easy to set up retirement where an employee may defer up to $13,000 in 2019. Employees age 50 or over can make a catch-up contribution of up to $3,000. The salary reduction contributions under a SIMPLE IRA plan are “elective deferrals” and employees can usually put away as little as 1% of their overall salary.  If you simply earn 1099 income, you can be eligible to put way as much of your net income up to the annual limits.

If you have employees in the business or you want to make a matching contribution to yourself, there are two important rules to remember.  You are generally required to either:

  1. match each employee’s salary reduction contribution on a dollar-for-dollar basis up to 3% of the employee’s compensation or
  2. make a nonelective contributions of 2% of the employee’s compensation.

The one main catch to the SIMPLE IRA is that you must get the plan set up by October 1st of the calendar year you plan to fund the SIMPLE IRA Plan, and you are not required to make contributions year to year.   Investment options tend to be broad because this operates just like a Traditional IRA or Roth IRA account that you would invest with regularly.

The SEP IRA Plan

A Simplified Employee Pension (SEP) IRA is an attractive option for many business owners because it involves very little start-up and operating costs.  It can also be set up until the time you file your taxes, so you can still go back and potentially fund one of these for 2018.  Many individuals or people who have a side hustle set up a SEP plan to contribute to their own retirement at higher levels than a traditional IRA allows. If you don’t have a ton of net income, a Traditional IRA or Roth IRA may be the easiest option.

As of 2019, contributions cannot exceed the lesser of 25% of the employee’s compensation for the year or $56,000 excluding catch up contributions. Investment options tend to be broad because this operates just like a Traditional IRA or Roth IRA account that you would invest with regularly.

The challenge with SEP IRA plans is when you start to bring employees into the business because you must contribute the same percentage contribution into their plans as you do into your own.  You can set these up excluding employees for 3 years (you can do a shorter time frame), but if you have many employees that work for you for a longer-term time frame it can become cost prohibitive.

However, if you are going to be sole proprietor side hustle type business or a single member LLC business, this can be a very viable long-term option.

The Solo 401(k) Plan

There are still many sole proprietors or people who have a side hustle that do not realize a 401(k) plan is available for business of one (or one plus your spouse) called a Solo 401(k).  Sometimes you’ll hear these referenced as an Individual(k) plan as well.

With the Solo 401(k) plan, you are eligible to make elective deferrals of your salary just as you would if you were working for a large corporation.  That means you’ll be able to contribute as much as $19,000 in 2019 for elective deferrals and make a catch-up contribution of $6,000 if you were born in the year 1969 or earlier (50 or older).  Even if you are sole proprietor and make net income only, you are still eligible to make these elective deferral contributions.

In addition, you can also make something called ‘profit sharing’ contributions just as large employers make today.  For 2019, you can make profit sharing contributions to the extent that it gets your total elective deferrals and profit-sharing contributions to a maximum of $56,000.  For small businesses where you take a salary, the profit-sharing contribution is 25% of your salary, and for sole proprietors it is 20% of your business net income.

One of the advantages of the Solo 401(k) versus the SEP and SIMPLE plans is that you can borrow on your 401(k) just as you could if you worked for a large company.  It isn’t recommended to borrow on your 401(k) unless it is a last resort, but you can borrow up to 50% of your 401(k) to a maximum of $50,000.  Remember, with a Solo 401(k), your spouse or partner can be on payroll as well and be a participant in this type of retirement plan, and these plans for the employee portion of contributions must be set up and funded by 12/31 in the calendar year you plan to contribute to them.  Profit sharing contributions can be made the following calendar year up until the time you file your corporate taxes.

Investment options tend to be more limited with a Solo 401(k) unless you can find a plan that will allow you to set up a self directed brokerage account.  You will generally be limited to what you can do by the fund family where you set up the plan.

Ted Jenkin, CFP®, AAMS®, AWMA®, CRPC®, CMFC®, CRPS®  

CEO and Founder oXYGen Financial, Inc.


Where Should You Be Investing In 2019?

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