1300 Ridenour Blvd, NW
2207 Spalding Drive
1. Traditional or Roth IRA
Best for: Those just starting out or saving less than $6,000 a year. If you are leaving a job to start a business, you can also roll your old 401(k) into an IRA.
IRA contribution limit: Up to $6,000 in 2020, plus a $1,000 catch-up contribution for those 50 or older.
Tax advantage: Tax deduction on contributions to a traditional IRA; no immediate deduction for Roth IRA, but withdrawals in retirement are tax-free.
Employee element: None. These are individual plans. If you have employees, they can set up and contribute to their own IRAs.
2. Solo 401(k)
Best for: A business owner or self-employed person with no employees (except a spouse, if applicable).
Contribution limit: Up to $57,000 in 2020 (plus a $6,000 catch-up contribution for those 50 or older) or 100% of earned income, whichever is less. To help understand the contribution limits here, it helps to pretend you’re two people: An employer (of yourself) and an employee (also of yourself).
In your capacity as the employee, you can contribute as you would to a standard employer- offered 401(k), with salary deferrals of up to 100% of your compensation or $19,500 (plus that $6,000 catch-up contribution, if eligible), whichever is less.
In your capacity as the employer, you can make an additional contribution of up to 25% of compensation.
3. SEP IRA
Best for: Self-employed people or small-business owners with no or few employees.
Contribution limit: The lesser of $57,000 in 2020 ($56,000 in 2019) or up to 25% of compensation or net self-employment earnings, with a $285,000 limit on compensation that can be used to factor the contribution. Again, net self-employment income is net profit less half of your self-employment taxes paid and your SEP contribution. No catch-up contribution.
Tax advantage: You can deduct the lesser of your contributions or 25% of net self-employment earnings or compensation — limited to that $285,000 cap per employee in 2020 — on your tax return. Distributions in retirement are taxed as income. There is no Roth version of a SEP IRA.
There is a special rule for sole proprietors and single-member LLCs: You can contribute 25% of net self-employment income, which is your net profit less half your self-employment tax and the plan contributions you made for yourself.
The limit on compensation that can be used to factor your contribution is $285,000 in 2020.
4. SIMPLE IRA
Best for: Larger businesses, with up to 100 employees.
Contribution limit: Up to $13,500 in 2020 or $13,000 for 2019 (plus catch-up contribution of $3,000 if 50 or older). If you also contribute to an employer plan, the total of all contributions can’t exceed $19,500.
Tax advantage: Contributions are deductible, but distributions in retirement are taxed. Contributions made to employee accounts are deductible as a business expense.
Employee element: Unlike the SEP IRA, the contribution burden isn’t solely on you: Employees can contribute through salary deferral. But employers are generally required to make either matching contributions to employee accounts of up to 3% of employee compensation, or fixed contributions of 2% to every eligible employee. Choosing the latter means the employee does not have to contribute to earn your contribution. The compensation limit for factoring contributions is $285,000 in 2020.
5. Defined benefit plan
Best for: A self-employed person with no employees who has a high income and wants to save a lot for retirement on an ongoing basis.
Contribution limit: Calculated based on the benefit you’ll receive at retirement, your age and expected investment returns.
Tax advantage: Contributions are generally tax deductible, and distributions in retirement are taxed as income. An actuary must figure your deduction limit, which adds an administrative layer.