Self-Employed? This Retirement Plan Could Soon Offer You a Roth Savings Option

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It’s an option that might benefit you tremendously. 

You might assume that if you’re self-employed, you’re at an automatic disadvantage when it comes to retirement savings plans. But actually, if anything, being self-employed opens the door to more account choices.

If you’re a salaried employee, you might have access to a 401(k) plan through your job. And if not, you might have to look to a traditional IRA or Roth IRA. But your options pretty much end there.

If you’re self-employed, you can fund a solo 401(k), which is a 401(k) plan you manage yourself, a traditional IRA, or a Roth IRA. But you can also save in a SIMPLE or SEP IRA. The latter two options offer the benefit of higher annual contribution limits than traditional and Roth IRAs.

This year, a SEP IRA is an attractive option for retirement savers in particular. That’s because SEP IRAs allow you to sock away up to 25% of your net earnings for retirement, up to a maximum of $66,000. Traditional and Roth IRAs, by contrast, max out this year at $6,500 for savers under age 50 and $7,500 for those who are age 50 or older.

But if there’s one negative thing to be said about SEP IRAs, it’s that they’ve historically not allowed for a Roth savings option — that is, until now.

SEP IRAs are changing for the better

When you save in a Roth retirement plan, you forgo a tax break on the money you put in. What you get instead, though, are tax-free investment gains in your account and tax-free withdrawals once you retire.

The latter is really important, because as much as paying taxes can be a burden while you’re working, they can become an even bigger burden once you’re retired and trying to live on a fixed income. So avoiding taxes later in life is something you may want to take steps to do.

Meanwhile, beginning in 2023, SEP IRAs will offer a Roth version so savers can benefit from higher contribution limits and tax-free withdrawals down the line. Plus, SEP IRAs offer all of the benefits of Roth IRAs without the restrictions.

With a Roth IRA, there are income limits to consider. If your earnings exceed $138,000 as a single tax-filer or $218,000 as a married couple filing jointly, your Roth IRA contributions start to phase out. And above incomes of $153,000 and $228,000, respectively, the option to save in a Roth IRA goes away this year.

But there are no income limits to worry about with a SEP IRA. Granted, your allowable contributions will be based on your income. But you can fund a SEP IRA whether you earn $40,000 or $400,000 a year.

A savings option worth exploring

You may be used to funding a SEP IRA and snagging an upfront tax break on your contributions. Giving up that benefit might be challenging. But you’re apt to appreciate having access to tax-free income once you retire and money inevitably gets tighter. So once your SEP IRA adopts these new rules, it pays to consider taking advantage of the Roth savings option.

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