?? 12/31/2022 Deadline for Individual 401(k) Two Tax and Investment Strategies for the Self-Employed

As a self-employed individual, business owner, consultant, or entrepreneur, you can create your career path and be your boss. But with this freedom comes the responsibility of managing your finances, including planning for retirement. With so many options available, it can be overwhelming to decide which type of retirement plan is right for you. This article will compare two popular options for self-employed individuals: the individual 401(k) and the defined benefit plan.

?Individual 401(k)

?An individual 401(k) is a type of retirement plan specifically designed for self-employed individuals and small business owners. It allows you to contribute both as an employee and as an employer, which can result in higher contribution limits than traditional 401(k) plans. Your spouse can be added to this plan, but no other W2 employees.

?One of the main advantages of an individual 401(k) is the high contribution limits. As of 2022,?per the IRS,[1]?the maximum contribution limit for an individual 401(k) is $61,000 per year or $67,500 if you're over 50. This includes both employee and employer contributions, which can add up quickly if you're self-employed.

?Another advantage of an individual 401(k) is the flexibility to choose from various investment options. You can choose from various mutual funds, ETFs, and other investment vehicles to create a portfolio that aligns with your retirement goals and risk tolerance. This allows you to tailor your investments to your specific financial situation and needs.

?If you have W2 employees, a?safe harbor 401k?could be a good solution if you, the owner, are looking for a larger tax deduction and contribution limit.[2]

?Defined Benefit Plan

?A?defined benefit plan[3]?is a type of retirement plan that provides a guaranteed monthly income for the rest of your life. The employer typically funds these plans, and the benefit is based on a formula that considers factors such as your salary and years of service.

?One of the main advantages of a defined benefit plan is the guarantee of a steady income stream in retirement. You'll know exactly how much you'll receive each month, which can provide peace of mind and make it easier to plan for the future.

?Another advantage of a defined benefit plan is the higher contribution limits compared to other retirement plans. The maximum contribution limit for a defined benefit plan is determined by actuarial calculations and can be significantly higher than the limits for individual 401(k) plans. This can be especially beneficial for high-earning self-employed individuals looking to maximize their retirement savings.

?For 2022, up to $245,000 can be contributed to a?defined benefit plan.

?However, there are also some drawbacks to consider with defined benefit plans. These plans can be more expensive to set up and maintain than other retirement plans. They may not be viable for small businesses or self-employed individuals with irregular income streams.

Factors to Consider:

?When deciding between an individual 401(k) and a defined benefit plan, there are several factors to consider:

• ?Contribution limits: If you're looking to maximize your retirement savings, the higher contribution limits of an individual 401(k) or a defined benefit plan may be appealing.
• ?Investment options: Both plans allow you to have control over your investments and the ability to choose from a variety of options.
• ?Business size: If you have multiple employees, an individual 401(k) or defined benefit plan may not be the best option, as you'll need to offer the same plan to all eligible employees. A SEP IRA or safe harbor 401k may be a better fit.
• ?Cost: Both individual 401(k) and defined benefit plans have associated costs, including administrative fees and investment expenses. Be sure to carefully consider the charges of each program and how they fit into your budget. Custodians such as Fidelity and Schwab now offer no-cost Individual 401k plans, whereas Defined Benefit plans require more administrative costs.

??Conclusion

?Retirement planning is an essential aspect of financial planning for self-employed individuals, and choosing the right retirement plan can significantly impact your financial security in the long term.

?Individual 401(k) and defined benefit plans have their advantages and disadvantages; the best option for you will depend on your specific circumstances and financial goals.

?I think it's essential to carefully weigh the pros and cons of each option and consult with a financial advisor to figure out which plan is the best fit for you. You can build a strong foundation for a secure retirement with careful planning and consistent saving.

I want to let you know that some retirement plans have a December 31 deadline, so please get started immediately.

Schedule a quick 15-minute meeting to find out if it might fit you!

Please feel free to share some times you're available, or you can also pick from my Calendly if it's easier for you.

#taxdeductions #taxsavings #retirementplanning #solopreneur #consultant

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[1]?https://www.irs.gov/publications/p560

[2]?https://www.irs.gov/retirement-plans/plan-sponsor/401k-plan-overview

[3]?https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-defined-benefit-plan-benefit-limits