For most people, the equation for retirement is simple. Get a job, invest some of that paycheck money in a company 401(k), and hope for the best. But not everyone’s life works that way. There are entrepreneurs and small business leaders who have to look out for their own retirement as well—and they have to create their own retirement plans if they are going to succeed. There’s just one question. What kinds of Self-Directed IRAs do they have available to them?
There are lots of options for self-employed small business owners to use for retirement. But in this article, we will highlight some of the key ones that many of them turn to when building a retirement nest egg.
Self-Directed Simplified Employee Pensions, or SEP IRAs
According to the IRS, “A SEP is a written plan that allows you to make contributions toward your own retirement and your employees’ retirement without getting involved in a more complex qualified plan.” In other words, it lives up to its name: a Self-Directed Simplified Employee Pension plan can indeed be very simple to use.
If you create a SEP-IRA, you have to know that at minimum, you have to establish one for every eligible employee.
This is simple for self-employed individuals who only have themselves as technical “employees”; in this case, it essentially becomes an individual plan. However, if you were to begin adding employees, you would face issues related to the SEP IRA if you weren’t to provide them to every eligible employee. But for solopreneurs, freelancers, and independent contractors, a Self-Directed SEP IRA can be a shortcut to making simple investments for retirement.
Self-Directed SIMPLE IRAs
The savings incentive match plan for employees—acronym SIMPLE—Is another written arrangement, typically aimed at companies with less than 100 employees, at which point you will reach the limit. According to the IRS, you qualify for a SIMPLE IRA plan if you do not maintain another qualified plan (unless the other plan is for collective bargaining employees) and as long as your company doesn’t employee that current limit of up to 100 employees.
Why choose a SIMPLE IRA? This is a nice arrangement in which you can create an employee matching plan for your employees. For small businesses, this can be a nice way to incentivize people to join your company; when talented workers ask you about your retirement benefits, you can point to the SIMPLE IRA and feel confident that you do indeed provide a good retirement benefit for them.
Other Self-Directed IRAs
If you are an entrepreneur who runs your own business, you can use a savings plan listed above, depending on your qualification. But for many independent contractors, another step is to sign up for a Self-Directed Roth IRA, which has minimal requirements. This after-tax style of investing is a powerful way to save some money for retirement. It does have some limits; for example, if you are earning more than the upper limits, then you will notice the restrictions kicking in.
It’s worth exploring the full range of potential options you have in store if you are an entrepreneur. And that’s where it helps to know the lay of the land. There are far more retirement account types than most people even realize, including Solo 401(k) plans, for example. Continue to explore your options and you will likely find that there’s an account type that appeals to your specific situation.