Retirement tax questions

Here are some plans that a self-employed individual can choose from.

What is a good retirement plan for self-employed?

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

• Traditional or Roth IRA.(best when starting out)

  • For 2022, 2021, 2020 and 2019, the total contributions you make each year to all of your traditional IRAs and Roth IRAs can't be more than:

    • $6,000 ($7,000 if you're age 50 or older), or
    • If less, your taxable compensation for the year
• Solo 401(k)

  • The limit on employee elective deferrals (for traditional and safe harbor plans) is:

  • $20,500 in 2022 ($19,500 in 2021 and 2020; and $19,000 in 2019
• SEP IRA. 
  • Contributions you make for 2021 to a common-law employee's SEP-IRA can't exceed the lesser of 25% of the employee's compensation or $58,000. (See special limitation for contributions for yourself)
• SIMPLE IRA.  (Must allow employees to participate, see details)
  • The amount the employee chooses to have you contribute to a SIMPLE IRA on his or her behalf can't be more than $13,500 for 2021 and increases to $14,000 in 2022 

More information can be found in IRS Publication 560.

Compensation limits for 2021 and 2022. For 2021, the maximum compensation used for figuring contributions and benefits is $290,000. This limit increases to $305,000 for 2022

Elective deferral limits for 2021 and 2022. The limit on elective deferrals, other than catch-up contributions, is $19,500 for 2021 and $20,500 for 2022. These limits apply for participants in SARSEPs, 401(k) plans (excluding SIMPLE plans), and a couple of others.

Overall limit on contributions

Total annual contributions (annual additions) to all of your accounts in plans maintained by one employer (and any related employer) are limited. The limit applies to the total of:

• elective deferrals (but not catch-up contributions)
   
• employer matching contributions
   
• employer nonelective contributions
   
• allocations of forfeitures

The annual additions paid to a participant’s account cannot exceed the lesser of:

1. 100% of the participant's compensation, or
    
2. $58,000 ($64,500 including catch-up contributions) for 2021;  $57,000 ($63,500 including catch-up contributions) for 2020.

However, an employer’s deduction for contributions to a defined contribution plan (profit-sharing plan or money purchase pension plan) cannot be more than 25% of the compensation paid (or accrued) during the year to eligible employees participating in the plan (see Employer Deduction in IRS Publication 560 (above).