Most IRA contributions must be made by April’s Tax Day. Unless you’re self-employed and got an extension to file your tax return.
That means you also might be able to contribute to, and even establish, a retirement plan for your entrepreneurial endeavor.
Here's an overview of some of the more popular, and relatively easy, self-employed retirement plans to which you can still contribute by Oct. 15 if you got a filing extension.
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.
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 2023 tax returns, that's next Tuesday, Oct. 15.
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 2023 taxes, that's a $66,000 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.
You can put all your net earnings from self-employment in the plan. For the 2023 tax year, as a sole proprietor you can defer all of your net self-employment earnings, or a maximum of $15,500. If you're age 50 or older, the limit is increased by a $3,500 catch-up contribution.
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), Solo-K, or uni-401(k) — you can make both owner and employee contributions, increasing the amount you can save.
For the 2023 tax year, you can make annual salary deferral up to $22,500. If you're age 50 or older, you're allowed an additional $7,500 contribution.
You also can contribute up to an additional 25 percent of your net self-employment earnings for a total of $66,000 for the 2023 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 2023 return, you can't contribute to your Solo-K for that year unless you established it by Dec. 31, 2023.
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 2024 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 (sorry, not sorry). Things can get complicated, and quickly.
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.
You also might find these items of interest:
- Being the boss tax basics
- Tax implications of business entity choices
- IRS delays Roth workplace retirement plan catch-up requirement to 2026
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