The IRS has issued the 2023 retirement contribution limits and the differences between what salaried workers can sock away and how much self-employed workers can save are striking. We’ll discuss how some workers can supersize their tax-deferred retirement savings in 2023 and if it applies to you.
A financial advisor could help you create a financial plan to reach your retirement goals.
Some Workers Can Supersize Their Tax-Deferred Savings
If you’re participating in a workplace 401(k) plan, you can’t contribute more than $22,500, or $30,000 if you’re older than 50 and can afford to make the $7,500 maximum limit in catch-up contributions. The limits are much lower when it comes to traditional IRAs, Roth IRAs, which max out at $6,500, or $7,500 with the 50-and-over $1,000 catch-up contributions.
If you’re self-employed you can invest up to $66,000 in either a SEP IRA or a solo 401(k) plan. The trick here is that, as a self-employed worker, you get to contribute as an employee and as an employer.
Of course, there are a few catches. According to the IRS, you need to file a Schedule C Profit or Loss from Business (Sole Proprietorship) with your annual federal tax return. This means no more hiding cash payments off the books and away from the tax man.
You’ll also need to set up a separate account. This is available through big brokerage firms and others – along with the fees and required paperwork. Although some outlets don’t charge fees, including Fidelity, Schwab and E*Trade.
How to Make Contributions With a SEP IRA and Solo 401(K)
With the SEP IRA, you can contribute up to 25% of your net earnings as an employee, with a cap of $66,000. For self-employed workers, the calculation is based on net earnings minus one-half of your self-employment tax and contributions to your own SEP-IRA.
With the solo 401(k), you can contribute all of your self-employed income up to $22,500 as an employee. And then $43,500 in profit-sharing contributions as the employer, up to the $66,000 limit, as well as another $7,500 in over-50 catch-up money. Keep in mind that the annual contribution limits apply to all your 401(k) accounts.
So if you’re also contributing to a workplace 401(k), you’ll need to include that amount as part of your total annual $66,000 limit. You also can contribute to traditional and Roth IRAs, up to the IRS income limits for contributions and deductions.
Additional Benefits With a SEP IRA or Solo 401(k)
The solo 401(k) also allows account holders to take loans against their accounts, just like many workplace plans do. Solo 401(k) owners can borrow up to $50,000 against their accounts. Or they can borrow 50% of the total account value, whichever is smaller.
Another potential benefit of using a SEP IRA or solo 401(k) is that deferring income until you withdraw your money in retirement lowers your adjusted gross income (AGI) on your tax return.
This not only cuts your overall tax bill but can help lower the income of high-earning self-employed workers to the level where their AGI allows them to claim the qualified business tax deduction. That option lowers their taxable business income by 20%, cutting a big chunk out of their ultimate tax bill.
Before making contributions to your workplace retirement plan, make sure you’re up to date with the contribution limits. In 2023, you can’t contribute more than $22,500 in your 401(k) if you’re under the age of 50. If you are 50 years old or over can contribute up to $30,000 to your 401(k) and which includes adding to the $7,500 maximum limit in catch-up contributions. But if you are self-employed, you have some perks whether you use a SEP IRA or a solo 401(k) plan. Being a self-employed worker means you can make contributions as an employee and as an employer.
- A financial advisor can help you figure out how to maximize your 401(k) savings. SmartAsset’s free tool connects you with vetted financial advisors who serve your area in five minutes. If you’re ready to be matched with local advisors, get started now.
- Do your research to make sure you’re making the best retirement choice for your needs. Here’s a breakdown of IRAs vs. 401(k)s.
- Don’t forget that you’ll get a Social Security check from the government in addition to your own retirement savings. See how big of a payment you can expect using SmartAsset’s free Social Security calculator.
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