Retirement Planning for the Self-Employed: What Advisors Need to Know | Financial advisors


Financial advisors help their clients weigh options based on different factors, such as where the clients want to live, expected living expenses, tax rates, and the goals the client wants to achieve in retirement. These goals can include gifts, trips, and buying big-ticket items like a new home.

Retirement planning can be even more difficult for self-employed clients, as they typically bear the burden of retirement savings on their own. That’s because they don’t have an employer who can offer matching 401(k) contributions, a pension, or other retirement benefits.

Financial advisors can play a crucial role in helping their self-employed clients maximize their retirement strategy by helping them choose the best retirement plan option for their business early on. Financial advisors can also help their small business owner clients evaluate the different types of retirement plans available to them and help them choose the best option based on several factors such as the number of employees the client has, its expected income level and tax bracket, as well as the administrative burden and costs associated with establishing and maintaining the pension plan.

Below are some of the most common retirement plan options that advisors can help their self-employed clients navigate. They can do this by helping them understand their various features, such as tax benefits and contribution limits.

  • Traditional or Roth IRA
  • Single 401(k)
  • Incentive plans, defined contribution plans and defined benefit plans

Traditional or Roth IRA

One of the features that a self-employed client can benefit from is the deduction of the contribution itself. For example, a single person who is not covered by a workplace pension plan, or who is married and whose spouse is also not covered by a workplace pension plan, can make a fully deductible contribution to a traditional IRA, regardless of its modified adjusted gross amount. Income. This deductible contribution is subject to limits of $6,000 per year and $7,000 if you are 50 or older.

Single 401(k)

As the name suggests, these plans are available to people who are self-employed and do not have employees. It is also known as a single participant 401(k) plan.

An exception is that the spouse can contribute if employed by the company. If so, they can contribute up to the standard contribution limits, and the employer can also add employer contributions up to the maximum limits.

For 2022, an employee can contribute a standard contribution of $20,500 and an additional catch-up contribution of $6,500 for those age 50 and older. The total contribution limit between employer and employee is $61,000 plus the additional catch-up contribution of $6,500. This gives a self-employed married couple the opportunity to save twice as much.

As a business owner, the individual is considered both an employer and an employee. The owner can make contributions to the plan at a time, subject to contribution limits and income limits.

For example, a client who has an S-corporation can contribute up to 100% of their salary as an employee and up to 25% of their remuneration as an employer.

A sole proprietor filing a Schedule C must calculate the allowable amount using a special calculation, which is 25% of net self-employment income, calculated as net profit minus one-half income tax. self-employment and plan contributions paid for himself.

One advantage of solo 401(k)s is that they can offer a Roth option. This means that as an employee, your client can contribute far more than they could to a Roth IRA, which can be a great planning opportunity for financial advisors and their clients.

The compensation limit used to account for the contribution limit is $305,000 in 2022. Keep in mind that these limits are per person and not per plan, so if your client is an employee of another company and has its own business on the side, the limits apply as a combined limit for both schemes.

Once the plan balance reaches $250,000 or more, solo 401(k)s have an additional administrative burden. Form 5500-EZ must be filed annually.


Simplified Employee Retirement Plans, or SEPs, have contribution and compensation limits similar to solo 401(k). Two differences, however, are that there is no catch-up contribution allowed for people aged 50 or over and there is no Roth option.

Another difference is that it can be used by small business owners with employees. However, employers must contribute an equal percentage of salary for each eligible employee, which can be costly for the employer. SEPs are easier to manage because there is no annual reporting requirement to the IRS and contributions do not have to be made every year.


Employee Savings Incentive Plan, or SIMPLE, IRAs are set up by the employer and allow both employers and employees to contribute, although contribution limits are lower than solo 401(k) ) and MS.

In 2022, up to $14,000 can be contributed plus a catch-up contribution of $3,000 if the client is age 50 or older.

If the individual contributes to another employer’s plan, the total cannot exceed $20,500. As an employer, your client can deduct employee contributions as a business expense. However, this can be costly as employers are generally required to make contributions to their employee accounts, either matching contributions of up to 3% or fixed contributions of 2% for all eligible employees. If the 2% option is chosen, the employer must contribute even if the employee does not. The same compensation limit of $305,000 applies in 2022.

Incentive plans, defined contribution plans and defined benefit plans

For self-employed clients who earn more and can afford to save even more for retirement, other great options include profit sharing plans, defined contribution plans, and defined benefit plans.

These can be established in addition to other retirement plans, but are more expensive to maintain and have a higher administrative burden due to IRS testing, annual filing requirements, and the hiring of an actuary.

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