Self-Employed Retirement Planning – 2023

Being your own boss comes with a lot of perks. Flexible schedule. Creative freedom. No one micromanaging your every move. But here's the thing, there's also no employer matching your 401(k) contributions or setting up a pension plan for you.

When you're self-employed, retirement planning falls squarely on your shoulders. And honestly? That's not a bad thing. You actually have access to some powerful retirement savings tools that can help you stash away serious cash while reducing your tax bill.

Let's break down what you need to know about self-employed retirement planning for 2023.

Why Retirement Planning Matters for the Self-Employed

If you're a sole proprietor, single-member LLC, freelancer, realtor, photographer, DoorDash driver, or any other type of gig worker, this is for you.

Without a traditional employer, you don't have access to a workplace retirement plan. But the IRS has created several retirement account options specifically designed for people like you. These accounts let you save for retirement while getting some nice tax advantages along the way.

The key is understanding your options and picking the one that fits your income level and savings goals.

SEP IRA: Simple and Powerful

A Simplified Employee Pension IRA (SEP IRA) is one of the most popular retirement accounts for self-employed folks. And for good reason, it's easy to set up, has low administrative costs, and lets you contribute a significant amount.

2023 SEP IRA Contribution Limits

For 2023, you can contribute up to 25% of your net self-employment earnings, with a maximum cap of $66,000.

Here's how that works in practice:

• If your net self-employment income is $100,000, you could contribute up to $25,000
• If your net self-employment income is $264,000 or more, you hit the $66,000 cap

Who Is a SEP IRA Best For?

SEP IRAs work great if you:

• Have no employees (or very few)
• Want a simple, low-maintenance retirement account
• Have variable income and want flexibility in how much you contribute each year
• Want to make larger contributions than a traditional IRA allows

One thing to keep in mind: contributions are made by the business, not the individual. So all contributions are considered employer contributions. This means you can't also make employee contributions like you would with a Solo 401(k).

Solo 401(k): Maximum Savings Potential

If you're looking to maximize your retirement savings, the Solo 401(k) is hard to beat. It's designed specifically for self-employed individuals with no employees other than a spouse.

2023 Solo 401(k) Contribution Limits

The Solo 401(k) allows two types of contributions:

Employee Contribution: Up to $22,500 (or $30,000 if you're 50 or older, thanks to the catch-up contribution)

Employer Contribution: Up to 25% of your net self-employment compensation

Combined Maximum: The total of both contributions can't exceed $66,000 (or $73,500 if you're 50+)

Breaking Down the Math

Let's say you're 45 years old with $150,000 in net self-employment income:

• Employee contribution: $22,500
• Employer contribution: $37,500 (25% of $150,000)
• Total: $60,000

If you're 52 years old with the same income:

• Employee contribution: $30,000 (includes $7,500 catch-up)
• Employer contribution: $37,500
• Total: $67,500 (but capped at $73,500, so you're good)

Who Is a Solo 401(k) Best For?

A Solo 401(k) is ideal if you:

• Have no employees (except possibly your spouse)
• Want to maximize your retirement contributions
• Have consistent, higher income
• Want the option to make Roth contributions (many Solo 401(k) plans offer this)

The downside? There's a bit more paperwork involved. Once your account balance exceeds $250,000, you'll need to file an annual report with the IRS (Form 5500-EZ). Not a huge deal, but worth knowing.

Traditional and Roth IRAs: The Basics

Even if you have a SEP IRA or Solo 401(k), you can still contribute to a Traditional or Roth IRA. These accounts have lower contribution limits but can be a nice addition to your overall retirement strategy.

2023 IRA Contribution Limits

• Under 50: $6,500
• 50 and older: $7,500 (includes $1,000 catch-up)

Traditional vs. Roth

Traditional IRA: Contributions may be tax-deductible. You pay taxes when you withdraw in retirement.

Roth IRA: Contributions are made with after-tax dollars. Withdrawals in retirement are tax-free. No required minimum distributions during your lifetime.

If you expect to be in a higher tax bracket in retirement, a Roth IRA might make more sense. If you need the tax deduction now, a Traditional IRA could be the better choice.

SIMPLE IRA: An Option for Small Teams

If you have a few employees, a SIMPLE IRA might be worth considering. It's designed for small businesses and has lower contribution limits than a SEP IRA or Solo 401(k).

2023 SIMPLE IRA Contribution Limits

• Employee contribution: Up to $15,500 ($19,000 if 50+)
• Employer contribution: Either a 3% match or a 2% non-elective contribution

SIMPLE IRAs require employer contributions, which can be a drawback if cash flow is tight. But they're relatively easy to administer and can be a good fit for small businesses with employees.

Which Plan Is Right for You?

Here's a quick comparison to help you decide:

Plan	2023 Max Contribution	Best For
SEP IRA	$66,000 (25% of income)	Self-employed with no employees, variable income
Solo 401(k)	$66,000–$73,500	Self-employed wanting maximum contributions
Traditional/Roth IRA	$6,500–$7,500	Everyone (can be used alongside other plans)
SIMPLE IRA	~$15,500–$19,000 + employer match	Small businesses with employees

Tax Benefits You Don't Want to Miss

Here's the beautiful part about these retirement accounts: contributions to SEP IRAs, Solo 401(k)s (traditional), Traditional IRAs, and SIMPLE IRAs are generally tax-deductible.

That means every dollar you contribute reduces your taxable income for the year. If you're in the 24% tax bracket and contribute $20,000 to a SEP IRA, you could save $4,800 on your tax bill. That's real money back in your pocket.

Plus, your investments grow tax-deferred until you withdraw them in retirement.

Important Deadlines

For 2023 contributions, you generally have until your tax filing deadline (including extensions) to make SEP IRA contributions. Solo 401(k) plans need to be established by December 31st of the tax year, but contributions can be made until the tax filing deadline.

Don't wait until the last minute. Setting up these accounts takes time, and you want to make sure everything is in order.

Let's Talk About Your Retirement Strategy

Retirement planning can feel overwhelming, especially when you're juggling the day-to-day demands of running your own business. But taking the time to set up the right retirement account can make a huge difference in your financial future: and your tax bill today.

Not sure which option is right for your situation? That's okay. Everyone's circumstances are different.

Ready to get your retirement planning on track? Schedule a consultation and let's figure out the best strategy for your self-employment income and long-term goals.

You've worked hard to build your business. Let's make sure you're building your retirement too.