Retirement planning is heavy on the minds of Americans in the wake of the COVID-19 pandemic and soaring inflation that is driving up consumer prices. While a large swathe of the population either doesn’t have a retirement plan or isn’t currently saving, the issue becomes even more convoluted for the self-employed who have no fallback to rely on when it comes to 401(k) plans or pensions.
Financial advisors play a crucial role in helping self-employed clients determine what kind of retirement strategy is best for their situation, based on their income levels and tax bracket, number of employees, benefits, and the costs to procure and maintain the plan, reports U.S. News and World Reports. With a variety of plan options out there, the choices can be daunting, and building a retirement plan together with a financial advisors can bring confidence and assurance to self-employed clients.
Traditional and Roth IRAs, though less common, are still a viable option if a client is self-employed. The key benefit is that contributions can be deducted come tax time, with annual contribution limits of $6,000 if a client is under 50 or $7,000 if they are 50 or older.
Another option is the solo 401(k), which is for a self-employed individual with no employees, although a spouse who works for the business can also contribute. In 2022, an employee can contribute up to $20,500 annually, plus an extra $6,500 if 50 or older for catch-up purposes; the total amount that an employer and employee can contribute is $61,000, plus the additional catch-up amount. What makes these plans attractive is that the self-employed individual counts as the employer and employee and can make contributions to the plan as both. These plans also cover Roth options.
Simplified employee pensions are similar to solo 401(k)s in that the contribution and compensation levels are roughly the same. A notable difference between the two plans, however, is that SEPs do not allow for catch-up contributions and also do not have Roth options. This plan can be used when a client has employees, but they must contribute an equal percentage of salary for every eligible employee.
The savings incentive match plan for employees (SIMPLE) IRA allows for contributions both from employees and the employer with max contributions of $14,000 in 2022, along with a $3,000 catch-up for those 50 and older. The employer generally has to make matching contributions up to 3% for all employees that contribute, or a fixed 2% regardless of employee contributions, but employee contributions can be written off as a business expense.
There are an assortment of retirement plan options for self-employed clients and for financial advisors looking to meet the income needs of their clients. Nationwide a variety of actively managed ETFs for advisors that cater to a range of investment exposures and strategies, including seeking a measure of downside protection within the major indexes.
For more news, information, and strategy, visit the Retirement Income Channel.
