Best Retirement Accounts for Solopreneurs

December 20, 2022

When embarking on the journey of entrepreneurship, many business owners can find themselves sacrificing the fundamental building blocks of financial security for the dream of scaling their business. Sometimes, these sacrifices may be necessary, and other times they are not.

For the solopreneur - an entrepreneur who does not have a team or staff - the decision to sacrifice financial security temporarily comes up often. One of the easiest but most important aspects of your financial health to overlook is your retirement. In many cases, the years spent working your business, end in more work for business owners because of the negligence in planning for a successful retirement. The delayed nature of investing in your future decreases the likelihood that a solopreneur can ever truly thrive independently of their businesses.

“When you don’t know what to do, you do what you know.”

Two of the best retirement accounts for solopreneurs are the Solo 401(k) and the SEP IRA. They’re easy to set-up and can be a gamechanger in securing the financial independence that many entrepreneurs seek. Below I detail both accounts, and how they work:

What is a SEP IRA?

A Simplified Employee Pension Plan or SEP IRA is simply a traditional individual retirement account (IRA)  for a self employed individual or small business owners. If a small business with employees chooses a SEP for herself, she must contribute the same percentage towards the accounts of all of her employees. This makes the SEP IRA more common for solopreneurs.

The SEP IRA is key for small business owners because it has two functions: building a retirement nest egg and reducing taxable income for entrepreneurs. When contributing to this account, your investments grow tax-deferred  until retirement and are taxed upon distribution.

How much can I contribute?

With a SEP IRA, a business owner can contribute approximately ten times more than they would be able to in a traditional IRA. The limit for contributions in 2023 is $66,000. Yet, the contribution needs to be the lesser of 25% of your total income or $66,000. This amount - the lesser of the contributions or 25% of compensation - is also the amount that an owner can deduct off of their business tax return. The income limit used to calculate the 25% is capped at $330,000 in 2023. All contributions for a tax year must be made by that year’s federal tax filing deadline.

Because SEP IRA contribution limits are dependent on income, it’s important to calculate your SEP contribution limit before contributing. Your contribution max is calculated as net profit minus one-half of the self-employment tax and your SEP contribution. This will reduce the percentage of your pre-adjusted salary you can contribute.

Unfortunately, there is no catch-up contribution once a business owner reaches age 50 or older for a SEP IRA.

When can I withdraw money from a SEP IRA?

Money can be withdrawn penalty-free at or after the age of 59 ½ . When you withdraw funds, the amount is subject to your income tax rate.

If you withdraw any money from a SEP IRA before the age of 59 ½ , you will be subject to a 10% early withdrawal penalty plus income taxes unless you qualify for one of the exceptions below:

  • First-time home purchase (up to $10,000)
  • Birth or adoption of a child (up to $5,000)
  • Qualified higher education expenses
  • Qualified medical expenses
  • Health insurance premiums when unemployed
  • Substantially equal payments
  • Withdrawals by a beneficiary, after the account holder has died

What is a Solo 401(k)?

A solo 401(k) is a tax-deferred retirement account for business owners and their spouses.

Many entrepreneurs like the idea of a solo 401K because it might remind them of the employer-sponsored 401(k) that they may have had at a previous job. This individual 401(k) has a similar function as it allows business owners to make tax-deferred contributions towards their retirement nest egg.

How much can I contribute?

There are no age or income restrictions for a solo 401(k) but the contribution limit is maxed at $66,000 for business owners under the age of 50. For the entrepreneurs that are age 50 and above, you can make catch up contributions that allow you to contribute up to $67,500 in 2022 and $73,500 in 2023.

While many people utilize their retirement accounts for tax benefits, a solo 401(k) can also be helpful in growing family wealth. If your spouse works for you - even part time - they are eligible to contribute $20,500 to their own solo 401(k).

Unique Benefits of Solo 401(k)s

A unique benefit of the individual 401(k) is that a business owner can borrow from the account. With this account type, you can borrow up to the lesser of 25% of the account value or $50,000.  If an entrepreneur chooses to borrow, they’ll have to pay the money back in 5 years or less unless the funds will be used to buy their primary home in which they’ll have up to thirty years for repayment. This loan will be subject to an interest rate comparable to the current interest rates at the time of borrowing.

The solo 401(k) also has a Roth option. If you choose this option, you’ll be able to make tax free withdrawals at retirement after the age of 59 ½ .

If you have a solo 401(k) and you also work for another company and participate in its 401(k) plan, the limits on employee contributions are cumulative across all accounts. The employer contribution limits are based on plans, meaning two unrelated employers can contribute up to the employer maximum annually. This is where having a financial professional on your team can help in determining your eligibility for the account type.

When can I withdraw money from a 401(k)?

Money from a solo 401(k) can be withdrawn penalty-free at or after the age of 59 ½ . When you withdraw funds, the amount is subject to your income tax rate.

If you withdraw any money from a solo 401(k) before the age of 59 ½ , you will be subject to a 10% early withdrawal penalty plus income taxes unless you qualify for one of the exceptions below:

  • Medical expenses that exceed 10% of your adjusted gross income
  • Permanent disability
  • Certain military service
  • A Qualified Domestic Retirement Order (QDRO) issued as part of a divorce or court-approved separation

What professionals should open a retirement account?

  • Founders
  • Real estate Agents
  • Consultants
  • Restaurateurs
  • 1099 employees
  • Contractors
  • Solo Marketers
  • Tattoo Artists
  • Freelance Professionals
  • Gig Economy workers
  • And more.

Financial planning can be difficult, but you don’t have to do it alone. By working with Yarnway Wealth Management, we can help you open these accounts and more. Schedule your introductory call with us today.


Learn how to jumpstart your business with our growth guide

In our guide you’ll learn the financial essentials for any business, marketing hacks, and the best ways to optimize your dollars.

Copyright 2023. Yarnway Wealth Management. All rights reserved.