Oct. 16 also is deadline for some self-employed retirement account contributions

October 9, 2023

You have a lot of responsibilities when you're self-employed. One includes making contributions to your retirement plan, which in some cases can be done as late as your filing extension deadline. (Unsplash+ in collaboration with Getty Images)

Most IRA contributions must be made by Tax Day. For the majority of taxpayers this year, that deadline was April 18.

But if you're self-employed and got an extension to file your 2022 tax return, you also got an extension to contribute to your entrepreneurial endeavor's retirement plan.

That deadline, in case the days have slipped by you, is this coming Monday, Oct. 16.

That added retirement contribution time is why some self-employed people, including me, file for an extension each year.

Here's a look at some of the more popular, and relatively easy, self-employed retirement plans to which you can still contribute in the next few days.

Simplified Employee Pension (SEP): SEP plans are popular because they are easy to set up and maintain.

You can establish a SEP with a simple one-page form, Form 5305-SEP, Simplified Employee Pension – Individual Retirement Accounts Contribution Agreement. Or, if you prefer, you can open a SEP through a mutual fund, bank, or other financial institution.

As the image below shows, the form is one of the shortest in the Internal Revenue Service's library.

Form 5305_SEP self-employed retirement plan

See more tax forms and more about them at Tax Forms 2023.

A SEP operates essentially like a traditional IRA for tax purposes, which is why it's often also referred to as a SEP-IRA. Once created, the administrative responsibilities are minimal. There are no employer tax filings.

There's also timing flexibility.

As noted, SEP contributions can be made as late as mid-October if you filed a filed a timely extension request.

And if you've put off setting up a self-employed retirement account, but at the last minute decide you want one, for your future financial needs and/or a tax break, a SEP-IRA could be the answer. You can establish one for a tax year as late as the due date, including extensions, of your income tax return for that year.

Again, for extended 2022 tax returns, that's next Monday, Oct. 16.

You can contribute as much as 25 percent of your net self-employment earnings up to annual maximum amounts that are adjusted each year for inflation. For 2022 taxes, that's a $61,000 contribution limit.

Note, however, that there isn't an added catch-up contribution amount for older entrepreneurs.

Savings Incentive Match Plan for Employees (SIMPLE) IRA: A SIMPLE plan provides you, and your employees if you've expanded beyond a one-person operation, with a relatively easy way to make retirement contributions.

A SIMPLE IRA has two sources of funding. Employees may choose to make salary reduction contributions to plan instead of receiving the amounts as part of their regular compensation. In addition, as the boss, you will contribute either matching or nonelective amounts to the accounts of eligible employees.

For the 2022 tax year, as a sole proprietor you can defer all of your net self-employment earnings or $14,000. If you're age 50 or older, the limit is bumped up the 2022 amount by another $3,000.

While you still have time to make a SIMPLE contribution, this plan must have been established by Oct. 1. The only wiggle room here is if you became self-employed after the first of October. Then the IRS says you can set up a SIMPLE IRA for the year "as soon as administratively feasible" after your business starts.

401(k) plan: There are more administrative requirements with a one-participant 401(k) plan, but that doesn't dissuade many self-employed people from opening this type of account.

The reason for dealing with more hassles? An owner-only 401(k) often allows for a larger contribution than a SEP or SIMPLE IRA.

The self-employed retirement plan works essentially like a traditional workplace defined contribution plan. As a single-participant 401(k) owner — which also is commonly referred to as a solo 401(k) or Solo-K plan — you can make both owner and employees contributions, increasing the amount you can save.

For 2022, you can make annual salary deferrals up to $20,500. If you're age 50 or older, you're allowed an additional $6,500 contribution.

You also can contribute up to an additional 25 percent of your net self-employment earnings for a total of $61,000 for the 2022 tax year.

As with company plans, you can tailor your self-employed 401(k) so that you can take out a loan or make hardship distributions.

But if you're just now thinking about a self-employed retirement plan, a solo 401(k) has the same drawback as a SIMPLE IRA: you must have set it up by the end of the tax year for which you want to make contributions

So even if you got an extension to file your 2022 return, you can't contribute to your Solo-K for that year unless you established it by Dec. 31, 2022.

And if a solo 401(k) appeals to you, make sure you set it by this year's end so you can make full use of it on your 2023 return, whether you file it in April or October.

Get solid professional advice: As you can see, relative simplicity, especially when it comes to setting up a self-employed retirement plan that meets IRS muster, is not always that simple (or SIMPLE; sorry, not sorry). Things can get complicated, and quickly. That's one of the reasons I stuck with a SEP.

You need to do your homework and determine which plan works for your tax rule tolerance (and patience) level, particular business, and personal finances.

If you want to establish any of these (or other) retirement plans, you can read more about them in IRS Publication 560.

You also should talk with a business, financial, or tax adviser (or all three) to make sure you don't make any costly mistakes in selecting and establishing a self-employed retirement plan.

They'll also be able to show you the tweaks and coming changes to self-employment retirement plans that are part of the new Setting Every Community Up for Retirement Enhancement (SECURE) 2.0 Act.

Best of all, those professionals will help ensure that select the self-employed retirement plan for your situation that will give you tax and nest egg benefits, including a later contribution deadline, for this and future years.

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