Retirement Account Options for Creative Entrepreneurs

While difficult for all workers, planning for retirement can be particularly challenging for creative entrepreneurs. After all, many of us juggle fluctuating incomes, unique business structures, and the ever-evolving demands of running our own ventures. However, finding ways to contribute to a comfortable retirement is absolutely essential for peace of mind and financial stability. Understanding all options available is the first step to doing so. From Solo 401(k)s to SEP IRAs, and SIMPLE IRAs to Defined Benefit Plans, several account options were tailor-made to meet the needs of self-employed people and small business owners. Each option offers its own unique benefits, some of which include high contribution limits, tax advantages, and flexibility. These options enable creative entrepreneurs to build a robust retirement plan that aligns with their financial goals and business realities. Read on to learn more about which plan might be right for you!

Retirement Account Options for Creative Entrepreneurs

One Participant or Solo 401(k)

A One-Participant or Solo 401(k) is a retirement savings plan tailored specifically for both solopreneurs and small business owners without any employees other than their spouse. This plan combines many of the benefits of a traditional 401(k) with the simplicity and flexibility needed by solopreneurs.

High contribution limits are one of the key advantages of a Solo 401(k). As of 2024, participants can contribute up to $22,500 as an employee, with an additional $7,500 catch-up contribution if they are over the age of 50. As an employer, they can contribute up to 25% of their net self-employment income for a combined total limit of $66,000. This dual contribution structure makes the Solo 401(k) an attractive option for high-earning solopreneurs who want to maximize their retirement contributions.

Benefits for Solo Entrepreneurs and Small Business Owners

Contributions are tax-deductible, which reduces your taxable income and provides immediate tax savings. Plus, the earnings on these contributions grow tax-deferred until withdrawal. If you withdraw during retirement, you might find yourself in a lower tax bracket and would therefore benefit from the deferral.

Another compelling element of the Solo 401(k) is your ability to take out a loan against the balance of your account. This provides immediate access to funds in times of need without incurring the penalties typically associated with early withdrawals from other retirement accounts.

To recap:

• Contribution Limits: As of 2024, you can contribute up to $22,500 as an employee, plus an additional $7,500 if you’re over 50. As an employer, you can contribute up to 25% of your net self-employment income, up to a total limit of $66,000.
• Tax Advantages: Contributions are tax-deductible and earnings grow tax-deferred.

SEP IRA (Simplified Employee Pension)

The SEP IRA (Simplified Employee Pension) was also designed for solopreneurs and small business owners who want a more straightforward, tax-advantaged way to save for retirement. This plan is particularly appealing because of its simplicity and high contribution limits.

As of 2024, business owners could contribute up to 25% of their net self-employment income—again, with a maximum limit of $66,000. This generous limit allows solopreneurs to bolster their retirement savings in years when their business performs well.

Benefits for Solo Entrepreneurs and Small Business Owners

For solopreneurs and small business owners, a SEP IRA is advantageous because it’s easy to manage. Unlike other retirement plans that require complex setup and ongoing maintenance, SEP IRAs are relatively straightforward. Contributions are tax-deductible, which lowers the business owner’s taxable income. Like the Solo 401(k), funds deposited into your SEP IRA grow tax-deferred until withdrawal. Again, this tax-deferred growth can be particularly beneficial for small business owners who anticipate being in a lower tax bracket during retirement.

With SEP IRAs, there are no mandatory annual contributions, which allows you to adjust contributions based on your business’s fluctuating profitability each year. In combination with the high contribution limits and tax benefits, this flexibility makes the SEP IRA a great option for solopreneurs hoping to simplify their retirement planning while maximizing their savings.

To recap:

• Contribution Limits: You can contribute up to 25% of your net self-employment income, with a cap of $66,000 for 2024.
• Tax Advantages: Contributions are tax-deductible, and earnings grow tax-deferred.

SIMPLE IRA (Savings Incentive Match Plan for Employees)

The SIMPLE IRA (Savings Incentive Match Plan for Employees) is intended for small businesses with 100 or fewer employees. It offers a straightforward and cost-effective way to provide employees with retirement benefits while also allowing the business owner to save for his or her own retirement. As of 2024, employees can contribute up to $15,500 annually. They can contribute an additional $3,500 each year if over the age of 50.

Employers are required to make contributions as well. They can do so either by matching employee contributions up to 3% of their salary or by making a fixed 2% contribution to all eligible employees’ salaries regardless of whether they contribute themselves. This structure is perfect for small business owners who value their workers and want to provide a meaningful benefit to their employees without the administrative complexities or costs of other retirement plans.

Benefits for Solo Entrepreneurs and Small Business Owners

So, why a SIMPLE IRA? They’re easy to set up and administer compared to other retirement plans like 401(k) plans. This simplicity reduces the administrative burden on the business owner. Plus, the mandatory employer contributions help attract and retain employees by offering a valuable benefit that enhances their financial security.

Of course, the tax advantages are also significant for both employer and employee. Employee contributions are made on a pre-tax basis and employer contributions are tax-deductible as a business expense. Furthermore, the funds grow tax-deferred until withdrawal. For those seeking a retirement plan that balances simplicity, employee benefits, and tax advantages, the SIMPLE IRA is an excellent choice.

To recap:

• Contribution Limits: Employees can contribute up to $15,500 annually, with an additional $3,500 for those over 50. Employers must either match employee contributions up to 3% of their salary or make a fixed 2% contribution.
• Tax Advantages: Contributions are tax-deductible, and earnings grow tax-deferred.

Traditional IRA

A Traditional IRA (Individual Retirement Account) is a versatile retirement savings option available to anyone with earned income—not just solopreneurs or small business owners. This type of IRA also offers tax-deferred growth. Again, this means that you won’t pay taxes on investment earnings until you withdraw the money in retirement.

For 2024, individuals can contribute up to $6,500 per year, with an additional $1,000 catch-up contribution allowed for those aged 50 years of age and over. Plus, contributions to a Traditional IRA may be tax-deductible. However, this depends on your income level and whether you or your spouse is covered by a workplace retirement plan. The immediate tax deduction of a Traditional IRA can be a major advantage for business owners who incur a hefty annual tax burden.

Benefits for Solo Entrepreneurs and Small Business Owners

Traditional IRAs are pretty easy to set up, as many financial institutions offer Traditional IRAs with minimal fees and straightforward account management. This accessibility makes it a great choice for busy solopreneurs who want to save for retirement without the complexity of managing a more intricate plan.

Because contributions can be made up until the tax filing deadline (typically April 15) for the previous year, this plan also offers flexibility for those who want to maximize their tax benefits based on annual financial performance. The tax-deferred growth of investments within a Traditional IRA can enormously amplify long-term savings.

To recap:

• Contribution Limits: For 2024, you can contribute up to $6,500, with an additional $1,000 catch-up contribution if you’re over 50.
• Tax Advantages: Contributions may be tax-deductible, and earnings grow tax-deferred. You can contribute up to April 15th of each year.

Roth IRA

Next, we have the Roth IRA. Unlike a Traditional IRA, contributions to a Roth IRA are made with after-tax dollars. This means that you don’t get a tax deduction in the year you make the contribution.

However, the primary benefit of a Roth IRA is that qualified withdrawals in retirement are completely tax-free, including both contributions and earnings. For 2024, individuals can contribute up to $6,500 annually, with an additional $1,000 catch-up contribution for those aged 50 and over. Bear in mind that there are income limits for contributing to a Roth IRA, so eligibility may be reduced or phased out for higher earners.

Benefits for Solo Entrepreneurs and Small Business Owners

One of the many benefits of a Roth IRA is the tax-free growth and withdrawal, which can be especially beneficial for those who anticipate being in a higher tax bracket in retirement. This makes the Roth IRA an excellent choice for solopreneurs who expect significant growth in their income or business value over time.

Roth IRAs also offer greater flexibility in retirement planning than some of the other options outlined below because contributions (but not earnings) can be withdrawn at any time without penalties or taxes. If you’re in a tough spot, your Roth IRA could be a source of much-needed emergency funds. This flexibility is particularly valuable for small business owners who may face unpredictable income streams.

Last but not least, the Roth IRA is straightforward to set up and manage. It complements other retirement savings plans well, which allows entrepreneurs to diversify their retirement strategies. For small business owners seeking a tax-advantaged way to save for retirement while maintaining flexibility and planning for long-term financial growth, the Roth IRA is a good strategic choice.

To recap:

• Contribution Limits: The same as a Traditional IRA, $6,500 annually, with an additional $1,000 for those over 50.
• Tax Advantages: Qualified withdrawals are tax-free, and contributions can be withdrawn at any time without penalty.

Defined Benefit Plan

A Defined Benefit Plan, which you might see referred to as a “traditional pension plan,” is a retirement plan where the employer commits to providing a specified monthly benefit upon retirement. This benefit is calculated based on factors like the employee’s salary history, duration of employment, and age at retirement.

Unlike Defined Contribution Plans, the responsibility for funding the plan and managing its investments lies primarily with the employer. For 2024, the annual benefit limit for a Defined Benefit Plan is the lesser of $245,000 or 100% of the participant’s average compensation for their highest three consecutive calendar years.

Benefits for Solo Entrepreneurs and Small Business Owners

This type of plan can work for solopreneurs and small business owners as well as employees. One of the most significant advantages is the ability to contribute amounts that far exceed the limits of other retirement accounts like 401(k)s or IRAs. This feature allows high-income earners to rapidly accumulate retirement savings while enjoying substantial tax deductions. Contributions to a Defined Benefit Plan are also tax-deductible.

This type of plan makes retirement income more predictable, too. That financial security and peace of mind is particularly valuable for business owners who want a guaranteed income stream in retirement, as the benefit amount is predetermined based on the plan’s formula. Like other retirement account types, contributions to this plan grow tax-deferred. That feature of the Defined Benefit Plan allows savings to compound without the drag of taxes on investment earnings.

However, it is important to note that Defined Benefit Plans require actuarial calculations and can involve higher administrative costs and complexity compared to other retirement plans. They also require a long-term commitment to fund the promised benefits. This makes them more suitable for stable, profitable businesses than for start-ups or solopreneurs.

To recap:

• Contribution Limits: Contributions are actuarially determined based on the benefit amount you choose, your age, and years until retirement. Limits can be much higher than other plans.
• Tax Advantages: Contributions are tax-deductible, and benefits grow tax-deferred.

Setting Up and Managing Retirement Accounts with Professional Help. Is It Necessary?

Retirement planning can be complex, especially for small business owners and solo entrepreneurs. Working with a professional like a financial advisor, actuary, or financial planner can be invaluable in navigating this complexity. Below is a breakdown of when to seek professional help and which accounts might benefit most from their expertise.

When to Use a Financial Advisor or Planner

Financial advisors and planners make the most impact for solopreneurs and small business owners engaged in comprehensive retirement planning. They can help you navigate multiple retirement accounts, tax implications, and investment strategies. These professionals will develop a tailored retirement plan that aligns with your financial goals, maximize tax advantages through strategic contributions and withdrawals, and manage and rebalance your investment portfolio to match your risk tolerance and retirement timeline.

For accounts like a Solo 401(k) or SEP IRA, a financial advisor can guide you through the setup process, ensure you’re maximizing contributions, and help with investment choices. While these accounts are relatively straightforward, professional advice can optimize your retirement savings strategy and ensure compliance with IRS regulations.

When to Use an Actuary

Actuaries mostly aid in setting up and managing Defined Benefit Plans. As noted above, these plans require precise actuarial calculations to determine the necessary annual contributions to meet future benefit obligations. An actuary will calculate the required contributions based on your desired retirement benefit, age, and years until retirement. He or she will also adjust contributions annually based on investment performance and changing actuarial assumptions. Lastly, an actuary will ensure the plan remains adequately funded and compliant with regulatory requirements.

Without an actuary, it would be nearly impossible to accurately determine and maintain the funding levels required for a guaranteed retirement benefit.

Accounts You Can Set Up Yourself

Traditional IRAs and Roth IRAs are among the simplest retirement accounts to set up and manage on your own. Most financial institutions offer easy-to-follow online setup processes and these accounts typically involve straightforward contribution limits and investment options.

With a bit of research and diligence, you can open an account online with a brokerage or bank, make regular contributions up to the annual limit, and choose from a wide range of investment options—think stocks, bonds, and mutual funds. These accounts don’t require the complex calculations or ongoing management that might necessitate professional help, which makes them suitable for self-management.

Final Thoughts on Saving for Retirement as a Creative Entrepreneur

When planning for retirement, creative entrepreneurs should consider a few additional strategies to maximize their savings and ensure a secure financial future. First, be sure to diversify your investments across various asset classes like stocks, bonds, and real estate to spread risk and enhance potential returns. Second, regularly review and adjust your retirement plan to align with your evolving financial goals and market conditions.

And don’t forget to take advantage of catch-up contributions if you’re over 50. These additional contributions can boost your retirement savings significantly as you approach retirement age. Also, keep an eye on tax-advantaged opportunities like Health Savings Accounts (HSAs) if you have a high-deductible health plan. HSAs offer triple tax benefits: contributions are tax-deductible, earnings grow tax-free, and withdrawals for qualified medical expenses are tax-free.

Lastly, don’t overlook estate planning. Ensure that your retirement accounts have designated beneficiaries and consider consulting with an estate planning attorney to create or update your will, establish trusts, and set up powers of attorney. These steps will protect your assets and ensure they are distributed according to your wishes.

Now, you’re well on your way to crating a robust and adaptable plan that supports your creative endeavors and financial well-being! Best of luck.