Last updated: September 13, 2022

Retirement plans are a great way to save money for your retirement. Many people try to use a simplified employee pension (SEP) plan or simplified retirement account (SRA). However, they have one major disadvantage: you risk losing all your contributions if any of these two types of accounts is dissolved.

There are a plethora of LLC retirement plan alternatives available. Simply put, it's a question of weighing the possibilities and selecting the one that works best for you.

LLC Retirement Plan Options

Retirement plan inside an envelope

While being self-employed has its privileges, it does not give you an excuse not to think about your retirement savings. In fact, it makes ensuring that money is saved that much more essential: unlike a worker who may have access to a 401(k) retirement plan, you're on your own.

The first step is to figure out how much you'll need to save for retirement with NerdWallet's retirement calculator. The amount you intend to save each year will influence the ideal account for you.

Second, determine where to invest the money. The good news is that you have a lot of choices if you go it alone.

Here are five self-employed retirement plans that may be appropriate for you:

  • Traditional or Roth IRA
  • Solo 401(k)
  • SEP IRA
  • SIMPLE IRA (Savings Incentive Match Plan)
  • Defined benefit plan

Traditional or Roth IRA Retirement Plan

Traditional and Roth IRA written on a chalk board

The Roth IRA is a unique retirement savings option for individuals who have not yet reached the age of 59.5.

In this account, if you choose to allow investments to grow tax-deferred - so your money can compound without you having to pay income tax and instead be distributed free from federal income tax under current law.

If you're looking to save money each year, then this is a great retirement alternative. Most contributions are generally tax-deductible.

However, earnings may be subject to state and federal income taxes upon withdrawal - if you haven't reached 59.5.

If you plan to raid your Roth IRA before the age of 59.5 , then you will face a 10 percent penalty on all distributions plus federal and state income tax.

Those just getting started will love this fund because of the low expense ratios and tax efficiency. If you're quitting your job to start a business, you may roll your old 401(k) into an IRA as well. The IRA contribution limit: $6,000 in 2021 and 2022 ($7,000 if age 50 or older).

The biggest advantage of an IRA is that contributions to one are deductible, allowing you to take a tax deduction for them. No immediate deduction for Roth IRA withdrawals, but they are free of taxes in retirement.

The Employee element has no value. These are not group plans; each is an individual strategy. Employees can set up and contribute to their own IRAs if they have them.

Solo 401(k) Retirement Plan

The Solo 401(k) plan is the most popular retirement saving vehicle for self-employed individuals. These are similar to SEP plans in that they are easy to start, allow you to contribute a lot of money each year, and keep taxes low.

Under this type of plan, you can contribute 25 percent of your net self-employment earnings up to $56,000 for 2019. You can also make a profit-sharing contribution of up to 20 percent of net earnings - which is capped at $56,000 in 2019 as well.

One of the most unique things about this type of plan is that it allows you to borrow money from your retirement savings if necessary. All you need to do is write a note and pledge your plan assets as collateral.

If you expect that you'll be withdrawing money from your retirement account, then this is a good plan for you. This type of account offers tax-deferred growth for qualified distributions up until age 59.5 with no penalty.

The Solo 401(k) allows for an employer contribution match, which makes this type of plan worth looking into. It's best for a business owner or self-employed person who doesn't have any employees (with the exception of a spouse, if applicable). You can also set one up through a financial institution that provides 401(k) retirement plans.

The maximum annual amount that you can contribute to a defined contribution plan is $55,000 for 2021.

You may make catch-up contributions (100% of earned income) in excess of the basic $55,000 limit if you're 50 or older by contributing an extra $6,500, or 10% of your earnings over the previous year.

This approach has the same tax advantages as a typical, employer-offered 401(k): You make pre-tax contributions, and your benefits after you reach age 59½ are subject to taxes.

Solo 401(k) rules: You can't contribute to a solo 401(k) if you have employees. However, you may hire your spouse so that they may also contribute to the plan. Your spouse can make up to the typical employee 401(k) contribution amount in 2021 and 2022, plus you can add in the employer contributions for an extra $55,000 ($61,000 in 2021 and 2022).

SEP IRA Retirement Plans

SEP IRA notebook cover

This is a simplified employee pension plan, not an IRA. You can't open a SEP on your own; you must work at a company that offers them (or self-employed with net earnings of $600 or more).

If you expect to reach retirement age within the next few years and don't need the money in your SEP for living expenses, then this type of retirement plan may be worth looking into.

To create a SEP, you'll need to determine how much money you can contribute each year based on your net income and the employees who are eligible to participate in the plan.

You must also decide on the funding method (percentage of your pay or a fixed dollar amount) and types of investments.

If you expect to reach retirement age within the next few years and don't need the money in your SEP for living expenses, then this type of plan may be worth looking into.

The SEP plan is a simplified version of a 401(k) that's available to sole proprietors and single-owner LLCs that don't have employees. Under this type of plan, you can contribute up to 25 percent of your net self-employment earnings up to $56,000 in 2019.

You must also decide on the funding method (percentage of your pay or a fixed dollar amount) and types of investments.

This approach has the same tax advantages as a typical, employer-offered 401(k): You make pre-tax contributions, and your benefits after you reach age 59½ are subject to taxes.

Contributions made to the SEP plan are deductible by both you and your company, whether or not you itemize deductions if your company is incorporated. If your company is unincorporated, you can deduct the contributions as a miscellaneous itemized deduction, but only if such expenses exceed 2% of your adjusted gross income (AGI).

SIMPLE IRA Retirement Plans

You can't open a SIMPLE on your own; you must work at a company that offers them (or self-employed with net earnings of $600 or more).

Your company can contribute matching, nonelective and discretionary amounts. The maximum contribution is the lesser of either 100% of your annual compensation or $13,000 in 2019. Your company can set a lower contribution limit.

The SEP plan is the ideal retirement saving vehicle for employees who work at a small company. You can contribute just about any amount of net earnings that you want - up to 100% of your compensation.

You don't have to worry about setting up or managing an individual retirement account, and you'll still have access to professional investment management services.

It is a simplified version of a 401(k) that's available to sole proprietors and single-owner LLCs that don't have employees. Under this type of plan, you can contribute up to 25 percent of your net self-employment earnings up to $56,000 in 2019.

You must decide on the funding method (percentage of your pay or a fixed dollar amount) and types of investments. This approach has the same tax advantages as a typical, employer-offered 401(k): You make pre-tax contributions, and your benefits after you reach age 59½ are subject to taxes.

Defined Benefit Retirement Plan

Defined Benefit Plan notebook cover

This plan can be offered by sole proprietorships, S corporations, LLCs that are taxed as partnerships, and self-employed individuals.

Participants must provide proof of age and service to qualify for retirement benefits.

You'll need to consult with a firm that specializes in defined benefit plans to find out how much you'll have to put into the plan each year to accumulate enough money for your retirement.

Contributions must be made in cash and are tax-deductible, unlike contributions to SIMPLE IRA plans, SEP plans, or SEP-IRAs.

The total annual contribution can't exceed $215,000 in 2018 ($215,000 is the combined employer/employee contribution limit for 2018, which is also the maximum amount that can be contributed to an IRA) or $56,000 if you're self-employed.

This approach has some drawbacks: For one thing, there's no convenient way to transfer the benefit of this type of plan to your heirs without paying taxes on it. And if you change or lose your job, the benefits are taxable as ordinary income until you reach age 59½.

Complications

Because of contribution limits, SEP plans can't be used as a substitute for 401(k)s if you have many employees and want to provide retirement benefits that are at least partly tax-deferred.

It is also more difficult to set up SEP plans than simplified profit-sharing plans or salary reduction simplified employee pensions (SARSEPs), and SEP plans must be set up before they can accept contributions.

Furthermore, SEP plans have stricter guidelines that you will need to follow if you want to deduct your own retirement contribution as a business expense on your tax return as compared with simplified profit-sharing plans.

For those reasons, the best way to plan for retirement is to set up a SEP plan or salary reduction simplified employee pensions (SARSEPs), which are similar to SEP plans but easier and less costly to establish.

FAQs

How Does an LLC Member Contribute to a 401K?

An LLC member can contribute to a 401k in the form of salary deferral contributions or employer matching contributions. An LLC member can also contribute tSEP plans if the business is eligible.

Can an LLC Owner Contribute to a 401K?

Yes, an LLC member who performs any services for the LLC can make salary deferral contributions to a 401k.

Can My LLC Contribute to My IRA?

With a simplified one-participant 401k plan, your LLC can contribute to your IRA or Roth IRA.

Can I Contribute to My IRA From My Business Account?

Yes, you can contribute to both a SEP plan and your IRA from the same business account.

Can an LLC Member Contribute to a 401k Plan...

To conclude, an LLC member can contribute to a simplified employee pension plan or simplified profit-sharing plan as long as the business is eligible. The LLC member can also contribute to a 401k through salary deferral contributions or employer matching contributions.

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