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Understand retirement planning options that help you keep more of what you earn, while also investing in your future.

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Self-Employed 401(k)

A 401(k) plan for a self-employed individual with no employees other than a spouse.

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Easy-to-maintain plan for a self-employed individual or small-business owner, with fewer than 5 employees 1 .

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A low-complexity plan for businesses with fewer than 100 employees looking to offer a retirement benefit.

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Fidelity Advantage 401(k)

An affordable plan for small businesses looking to offer a 401(k) for the first time.

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Fidelity 401(k)

An industry-leading 2 , customizable 401(k) that supports existing plans $1M and up.

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Investment-only account 3

A brokerage account for those who have their own separate retirement plan document.

Whether it’s just you or you and your employees, we have a retirement plan that’s right for you. Take a look at how they compare and find one that fits your needs.

Already have a 401(k) plan with another provider? Learn more about the support and value we can deliver with a Fidelity 401(k).

If you have a separate retirement plan established and you’d like to invest the assets in a Fidelity brokerage account, you may be interested in an investment-only retirement account. 3

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Who is the plan for?

SE 401(k) : Self-employed individual or business owner with no employees other than a spouse.

SEP IRA : Self-employed individual or small business owner, primarily those with only a few employees. 1

Fidelity Advantage 401(k) : Small and medium- sized businesses looking to offer a 401(k) for the first time.

SIMPLE IRA : Self-employed individuals or businesses with 100 or fewer employees.

How do contributions work?

SE 401(k) : Employers may contribute up to 25% of compensation, up to a maximum of $69,000 in 2024 ($76,500 if age 50 or older).⁵ Employees may contribute up to $23,000 for 2024 ($30,500 if age 50 or older).⁵

SEP IRA : Employers may contribute between 0% and 25% of compensation up to a maximum of $69,000 for 2024.⁵ Each eligible employee must receive the same percentage.

Fidelity Advantage 401(k) : Employers make matching contributions, up to 4% of the annual gross compensation of all employees.⁴ Employees may contribute up to $23,000 for 2024 (catch up contributions available).⁵

SIMPLE IRA : Employers contribute either a matching contribution of 1, 2, or 3% or a non-elective contribution of 2%. 7 Participants may contribute up to 100% of compensation with a maximum of $16,000 for 2024 ($19,500 if age 50 or older). 8

Who can contribute?

SE 401(k) : As someone who's self-employed, you can contribute as both employer and employee.

SEP IRA : Only the employer can contribute.

Fidelity Advantage 401(k) : Both employees and employers can contribute.

SIMPLE IRA : Both employees and employers can contribute.

What about fees and tax credits?

SE 401(k) : There are no account fees and no minimum to open an account, $0 commission for online US stocks and ETF trades.⁶

SEP IRA : There are no account fees and no minimum to open an account. $0 commission for online US stocks and ETF trades.⁶

Fidelity Advantage 401(k) : There are no additional management fees or, with limited exceptions, fund expenses beyond the $300 per quarter fee.

SIMPLE IRA : There are no account fees and no minimum to open an account, $0 commission for online US stocks and ETF trades.⁶

When can withdrawals be made?

SE 401(k) : You can take a withdrawal once you’ve had a triggering event, such as disability, plan termination, turning age 59 ½ or older, and a few others. However, some withdrawals may incur a 10% penalty. 4

SEP IRA : You can withdraw at any time, but a 10% penalty may apply if you're not yet age 59½. 4

Fidelity Advantage 401(k) : You can take a withdrawal once you’ve had a triggering event, such as disability, plan termination, turning age 59½ or older, and a few others.⁴ However, some withdrawals may incur a 10% penalty. In the event of certain types of financial emergencies, you may be able to take a hardship withdrawal.

SIMPLE IRA : You can withdraw at any time, but a 10% (or 25% if within the first two years of participation) penalty may apply if you're not yet age 59½. 4

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5 Self-Employed Retirement Plans to Consider

Elizabeth Ayoola

Many or all of the products featured here are from our partners who compensate us. This influences which products we write about and where and how the product appears on a page. However, this does not influence our evaluations. Our opinions are our own. Here is a list of our partners and here's how we make money .

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Being self-employed gives you a certain measure of freedom, but it doesn’t give you an excuse to skip out on saving for retirement.

In fact, it makes putting money away that much more crucial: Unlike an employee who might have access to a 401(k), you’re on your own.

And you might think you'll eventually sell the business and use that money to fund retirement, but what if you don't? Consider a retirement account not only a cushion, but also a tax-advantaged way to reduce income in your high-earning years.

First, you'll want to figure out how much you need to save for retirement with NerdWallet’s retirement calculator . The amount you plan to save each year will help determine the best account for you.

Then decide where to put that money. The good news is that flying solo gives you a lot of options. Here are five self-employed retirement plans that may work for you:

Traditional or Roth IRA

Solo 401(k)

Defined benefit plan

Capitalize

on Capitalize's website

1. Traditional or Roth IRA

Best for: Those just starting out. If you’re leaving a job to start a business, you can also roll your old 401(k) into an IRA .

IRA contribution limit : $7,000 in 2024 ($8,000 if age 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.

» In just a few minutes, you can open an IRA at an online brokerage. Review NerdWallet's picks for the best IRA providers to get started.

The details

An IRA is probably the easiest way for self-employed people to start saving for retirement. There are no special filing requirements, and you can use it whether or not you have employees.

The toughest part might be deciding which type of IRA to open: We’ve given in-depth coverage to the differences between traditional and Roth IRAs , but the tax treatment of a Roth IRA might be ideal if it’s early days for your business (read: you’re not making much money). In that case, your tax rate is likely to be higher in retirement, when you’ll be able to pull that money out tax free. Roth IRAs also don't have required minimum distributions, and Roth IRAs can be transferred to your heirs , tax-free.

One note: The Roth IRA has income limits for eligibility; those who earn too much can't contribute.

» Learn more about IRAs

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2. Solo 401(k)

Best for: A business owner or self-employed person with no employees (except a spouse, if applicable).

Contribution limit: For 2024, it's $69,000, plus a $7,500 catch-up contribution or 100% of earned income, whichever is less [0] IRS.gov . 2024 Limitations Adjusted as Provided in Section 415(d), etc. . Accessed Mar 16, 2022. View all sources , 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 in 2024 of up to 100% of your compensation or $23,000, plus that $7,500 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. Employer contributions must be made by the tax filing deadline , or extension date if applicable.

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 $345,000 in 2024.

Tax advantage: This plan works just like a standard, employer-offered 401(k): You make contributions pretax, and distributions after age 59½ are taxed.

Employee element: You can’t contribute to a solo 401(k) if you have employees. But you can hire your spouse so they can also contribute to the plan. Your spouse can contribute up to the standard employee 401(k) contribution limit , plus you can add in the employer contributions, for up to a total of $69,000 in 2024, plus catch-up contribution, if eligible. This potentially doubles what you can save as a couple.

How to get started: You can open a solo 401(k) at many online brokers. You’ll need to file paperwork with the IRS each year once you have more than $250,000 in your account.

This plan, which the IRS calls a “one-participant 401(k),” is particularly attractive for those who can and want to save a great deal of money for retirement or those who want to save a lot in some years — say, when business is flush — and less in others.

Keep in mind that the contribution limits apply per person, not per plan — so if you also have outside employment that offers a 401(k), or your spouse does, the contribution limits cover both plans.

One other thing to know: You can also choose a solo Roth 401(k) , which mimics the tax treatment of a Roth IRA. Again, you might go with this option if your income and tax rate are lower now than you expect them to be in retirement.

» Learn more about the solo 401(k)

Best for: Self-employed people or small-business owners with no or few employees.

Contribution limit: The lesser of $66,000 in 2023, $69,000 in 2024, or up to 25% of compensation or net self-employment earnings, with a $330,000 limit on compensation ($345,000 in 2024) 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. Be sure to make your contributions by the federal income tax filing deadline, usually mid-April, or the extension deadline if filing for extension.

Tax advantage: You can deduct the lesser of your contributions or 25% of net self-employment earnings or compensation — limited to that $330,000 cap per employee in 2023 ($345,000 in 2024) — on your tax return. Distributions in retirement are taxed as income. Previously, there was no Roth version of a SEP IRA. Under legislation signed by President Biden in December 2022, Roth contributions are now allowed [0] Senate.gov . SECURE 2.0 Act of 2022 . View all sources .

Employee element: Employers must contribute an equal percentage of salary for each eligible employee, and you are counted as an employee. That means if you contribute 10% of your compensation for yourself, you must contribute 10% of each eligible employee’s compensation.

Get started: You can open a SEP IRA at many online brokers just as you would a traditional or Roth IRA, with a few extra pieces of paperwork.

A SEP IRA is easier than a solo 401(k) to maintain — there’s a low administrative burden with limited paperwork and no annual reporting to the IRS — and has similarly high contribution limits. Like the solo 401(k), SEP IRAs are flexible in that you do not have to contribute every year.

The downside for you, as the business owner, is that you have to make contributions for employees, and they must be equal — not in dollar amount, but as a percentage of pay — to the ones you make for yourself. That can be costly if you have more than a few employees or if you’d like to put away a great deal for your own retirement. You cannot simply use a SEP to save for yourself; if you contribute for the year, you have to make contributions for all eligible employees.

» Learn more about SEP IRAs

retirement funds for small business owners

4. SIMPLE IRA

Best for: Larger businesses, with up to 100 employees.

Contribution limit: Up to $15,500 in 2023, plus catch-up contribution of $3,500 in 2023 if you're 50 or older (up to $16,000, plus a catch-up contribution of $3,500 in 2024). If you also contribute to an employer plan, the total of all contributions can’t exceed $22,500 in 2023 or $23,000 in 2024. Contributions must also be made by tax day or the extension deadline if applicable.

Tax advantage: Contributions to a traditional SIMPLE IRA are deductible, but distributions in retirement are taxed. Contributions made to employee accounts are deductible as a business expense. The legislation signed into law in December 2022 allows for Roth contributions, effective in 2023.

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 $330,000 in 2023, $345,000 in 2024.

Get started: The process is similar to a SEP IRA — you can open a SIMPLE at an online broker, with a heavier paperwork load than your standard IRA.

If you’re the owner of a midsize company with fewer than 100 employees, the SIMPLE is a fairly good option, as it’s easy to set up and the accounts are owned by the employees.

SIMPLE IRA contribution limits are significantly lower than a SEP IRA or solo 401(k), however, and you may end up having to make mandatory contributions to employee accounts, which can be expensive if you have a large number of employees who participate. Here's more on the SIMPLE IRA vs. a 401(k) .

The traditional SIMPLE IRA is also inflexible, particularly early on: Early withdrawals, before age 59½, are treated the same as early 401(k) or IRA distributions, in that they are taxed as income and subject to 10% penalty. But if you make a withdrawal within the first two years of participation in a SIMPLE IRA, the 10% penalty is increased to 25%. That means you also can’t roll over a SIMPLE to another retirement account within that two-year period. Zing.

One other thing to know: There is a 401(k) version of a SIMPLE, which works in much the same way but allows participants to take loans from their accounts. This version requires more administrative oversight and can be more expensive to set up.

» Learn more about the SIMPLE IRA

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.

Employee benefit: If you have employees, you generally offer this plan to them and make contributions on their behalf.

Get started: Your options for brokerages are more limited than with the above accounts, but Charles Schwab offers defined benefit plans.

People often lament the decline of pension plans, and this is exactly that: If you’re self-employed, you can set up your own pension — a guaranteed stream of income — in retirement by using a defined benefit plan.

So why wouldn’t everyone do it? They’re expensive, with high setup and annual fees. If you have employees, that fee will likely go up, and you’ll need to contribute on their behalf. They carry a heavy administrative burden each year, and they require a commitment to fund the plan with a certain amount per year. If you need to change that amount, you’ll pay additional fees. To make it worth it, you'd need to continue the plan for at least three years, financial advisors say.

The upsides are that you can stash a lot of cash in these, and you can defer taxes until retirement. If you’re fairly close to retirement, earning a high income that you know you’ll maintain and that allows you to save a significant amount per year — we’re talking $50,000 to $80,000 or more — you might consider using this plan to supercharge your savings efforts.

» Thinking about the future? Learn about succession planning for your business .

Where to open a retirement plan if you’re self-employed

Once you’ve decided to open one of these accounts, you’ll have to decide where to do it.

Most online brokers will allow you to open the four most common account types: IRA, solo 401(k), SEP IRA and SIMPLE IRA. » Ready to get started? Seek our picks for the best IRA providers

Each broker will walk you through the process of opening one of these accounts and explain any paperwork you may need to file with the IRS. But to be on the safe side, you may also want to work with an accountant.

Most financial advisors can also set up retirement plans for you.  

» Want help planning for retirement? Check out our retirement planning guide .

On a similar note...

Find a better broker

View NerdWallet's picks for the best brokers.

Robinhood

on Robinhood's website

retirement funds for small business owners

Retirement planning

Retirement plan basics for small businesses

January 16, 2024 | 18 minute read

For many business owners, a retirement decades in the future might seem like an abstraction (and a distraction) when there’s an enterprise to run with endless day-to-day demands. “Planning for your retirement and choosing a well-thought-out plan that’s right for your situation is about taking control of your life,” says Judith Anderson, senior vice president, Retirement & Personal Wealth Solutions at Bank of America. “It’s about today, not 30 to 40 years from now.” That’s because a well-thought-out plan can help small business owners work toward better economic security that will help them focus on their businesses and might also provide them with tax advantages now.

An employer-sponsored retirement plan also can help business owners attract and retain employees — especially if they’re considering offers from other employers. Many workers place a high priority on retirement benefits when choosing an employer.

Fortunately, small business owners can choose from many attractive retirement plans under the federal tax code. The best plan for a particular business depends on factors such as the size of the company, how much employees are able to contribute each year and how many administrative duties the business owner is prepared to take on. The following discussion of options for small employers assumes that the business owner has self-employment earnings or employee compensation from the business.

Options designed for small companies with employees

The sep ira.

The simplified employee pension (SEP) plan is an employer-sponsored retirement arrangement for companies with one or more employees, and employer contributions are made to individual retirement accounts (IRAs) established for each eligible employee. Footnote [1] Many smaller companies opt for SEP IRAs because they are cost-effective and relatively simple to run while still allowing the business owner to help their employees save for retirement. In this plan, business owners can make contributions to IRAs they set up for themselves and their employees. SEP IRAs can offer a full range of investment options, including stocks, bonds, mutual funds and exchange-traded funds (ETFs). The SEP IRA also may be a good choice or option for sole proprietors who want to maximize their retirement savings.

SEP IRAs are subject to maximum contribution limits, which are subject to change annually, so small business owners should check the IRS website for the most current information. Employer contributions generally must equal the same percentage of salary for all participating employees, including the business owner. So if a business owner makes an employer contribution equal to 10% of their salary, for example, participating employees also must receive an employer contribution equal to 10% of their compensation.

  • Simplicity: The SEP IRA potentially requires less maintenance than a 401(k).
  • Flexible contributions: Annual contributions aren’t mandatory to maintain a SEP IRA.
  • Tax advantages: The money a business owner contributes to the business owner’s own SEP IRA is generally tax deductible by the business and so is the cash the owner contributes to employees’ SEP IRA accounts. Any potential growth of contributions may be tax deferred. When a business owner withdraws money from a SEP IRA account, it is taxable as ordinary income, including during retirement. Starting in 2023, the business owner and employees may be able to elect for SEP IRA contributions to be made on a Roth (after-tax) basis when contributed and tax-free qualified distributions provided applicable requirements are satisfied. Small business owners should check with their tax advisors and SEP IRA providers.
  • Tax credits: Small business owners may be able to take advantage of a tax credit for small employer plan startup costs. Effective January 1, 2023, up to 100% of a business’s qualified startup costs may qualify for a three-year startup credit. A 100% credit is available for employers with up to 50 employees, and a 50% credit is available for employers with between 51 and 100 employees. Qualified startup costs include expenses related to the establishment and administration of the plan or to retirement-related education of employees. An additional credit of up to $1,000 per employee may be available based on contributions made by the employer to an eligible employer plan. The full additional credit is limited to employers with up to 50 employees and is phased out for employers with between 51 and 100 employees. Certain exceptions apply to the additional credit based on employees’ wage amounts.
  • Early withdrawals: Any withdrawal a plan participant receives before age 59½ is subject to an additional tax equal to 10% of the distribution unless an exception applies. For more information on taking distributions from a SEP IRA, small business owners can see IRA FAQs - Distributions (Withdrawals) .

Disadvantages

  • Inability to borrow against savings: As with any IRA, employees cannot take loans from their plan accounts.
  • Immediate vesting: This type of plan does not allow business owners to require that employees work for a certain number of years before their contributions are vested, so it does not provide as much of an incentive to stick with the company as plans like 401(k)s do, where such requirements are allowed. With a SEP IRA, contributions become 100% vested immediately.
  • No catch-up: For those age 50 and older at any time during the year, catch-up contributions are not allowed, as the employer makes all the contributions.

Deadline for contributions

Contributions are due no later than the due date for the employer’s federal tax return, including extensions.

The SIMPLE IRA

Designed for sole proprietors and businesses with 100 or fewer employees, the employer-sponsored SIMPLE IRA can be a cost-efficient way for small business owners to contribute to their retirement and their employees’ retirements. SIMPLE IRAs are subject to maximum contribution limits, which are subject to change annually, so business owners should check the IRS website for the most current information. Annual employer contributions are mandatory .

Employers must make either a 100% matching contribution up to 3% of employee compensation, or a nonelective contribution equal to 2% of compensation (up to an annual limit), but they cannot provide both. Investment choices vary by IRA provider, but generally include individual stocks, bonds, ETFs and mutual funds.

  • Cost: Plan setup or administrative fees for a SIMPLE IRA vary by provider, though some companies don’t charge for this. Costs also may include whatever fees the brokerage or investment company charges for maintaining an account.
  • Ease of setup: SIMPLE IRAs generally require less administrative upkeep than plans such as 401(k)s.
  • Tax advantages: Salary reduction contributions are made on a pre-tax basis. Generally, employer contributions made by the business (match or nonelective) are considered tax deductible for the employer. Any investment growth contributions might be tax-free as well, although distributions are taxable as ordinary income in the year of distribution. Starting in 2023, business owners and their employees may be able to elect for SIMPLE IRA contributions to be made on a Roth (after-tax) basis when contributed and tax-free qualified distributions provided applicable requirements are satisfied.
  • Tax credits: Business owners may be able to take advantage of a tax credit for small employer plan startup costs. Effective January 1, 2023, up to 100% of qualified start-up costs may qualify for a three-year startup credit. A 100% credit is available for employers with up to 50 employees, and a 50% credit is available for employers with between 51 and 100 employees. Qualified start-up costs include expenses related to the establishment and administration of the plan or to retirement-related education of employees. An additional credit of up to $1,000 per employee may be available based on contributions made by the employer to an eligible employer plan. The full additional credit is limited to employers with up to 50 employees and is phased out for employers with between 51 and 100 employees. Certain exceptions apply to the additional credit based on employees’ wage amounts. Small business owners should check with their tax advisor and their SIMPLE IRA provider.
  • Early withdrawals: Any withdrawal received before age 59½ is subject to an additional tax equal to 10% of the distribution unless an exception applies (in SIMPLE IRAs, the tax is increased to 25% for withdrawals taken within two years of the first employer contribution). For more information on taking distributions from a SIMPLE IRA, small business owners can see IRA FAQs - Distributions (Withdrawals) .
  • Relatively lower contribution limit than a 401(k): If a business owner and their employees wish to maximize the money they save for retirement and potentially reduce their tax benefits, other plan options may be more beneficial for the business. The pre-tax salary deferral limits in a 401(k) are higher.
  • Eligibility requirements: Generally, small business owners will not be permitted to make contributions to a SIMPLE IRA plan if they made contributions to any other qualified plan in the same year. An employer generally cannot maintain a SIMPLE IRA if it has more than 100 employees with $5,000 or more in compensation during the preceding calendar year. Business owners should work with a tax advisor to plan ahead if they wish to switch to this type of plan. For more information, business owners can see the IRS page SIMPLE IRA Plan .

Salary reduction contributions must be deposited in an employee’s SIMPLE IRA as soon as they can reasonably be segregated from the employer’s general assets but no later than 30 days after the end of the month for which the contributions are made. Matching and nonelective contributions are due no later than the deadline for the employer’s federal tax return, including extensions.

Small business 401(k)

A 401(k) plan can be established and maintained by most companies, including for-profit corporations, nonprofit corporations or partnerships.

Individual plan participants may elect to defer on a pre-tax basis or, depending on how business owners have set up the plan, as Roth contributions on an after-tax basis. A 401(k) plan also may be designed to permit participants to make after-tax contributions. Employers may make matching contributions, profit sharing contributions or other special types of contributions.

Total contributions, including those from the employer and plan participant, are limited to the lesser of 100% of compensation or a specific dollar amount set out in the federal tax code and adjusted annually by the IRS. For the most up-to-date contribution limits, see the IRS page 401(k) and Profit-Sharing Plan Contribution Limits .

If a business owner has opted for a traditional 401(k), where employee contributions are made on a pre-tax basis, participants do not pay federal income taxes on contributions or potential earnings until they are withdrawn. If a business owner has opted under the plan to allow participants to make Roth contributions, distributions of earnings on those contributions will be federal tax-free if they are qualified distributions.

  • Tax advantages: Employer contributions to a 401(k) plan are deductible up to 25% of aggregate employee compensation for the tax year, considering only a capped amount of compensation per employee. The capped amount is specified in the federal tax code and adjusted annually by the IRS. In addition, certain administrative costs and other plan expenses may be deductible.
  • Borrowing: If a plan allows for this option, participants may be able to borrow from their plan account. For more information on retirement plan loans, participants can see the IRS page Retirement Plan FAQs regarding Loans .
  • Tax credits: Small business owners may be able to take advantage of a tax credit for small employer plan startup costs. Effective January 1, 2023, up to 100% of qualified startup costs may qualify for a three-year startup credit. A 100% credit is available for employers with up to 50 employees, and a 50% credit is available for employers with between 51 and 100 employees. Qualified startup costs include expenses related to the establishment and administration of the plan or to retirement-related education of employees. An additional credit of up to $1,000 per employee may be available based on contributions made by the employer to an eligible employer plan. The full additional credit is limited to employers with up to 50 employees and is phased out for employers with between 51 and 100 employees. Certain exceptions apply to the additional credit based on employees’ wage amounts.
  • Paperwork: The potential downside of a 401(k) is that it does require some administrative work. For instance, plans must perform certain annual tests to make sure the contributions made and benefits under the plan do not discriminate in favor of highly compensated employees. Many small businesses hire a third-party administrator to help keep up with IRS requirements, which adds to the cost of managing the plan. Retirement planning for small business owners requires business owners to look at the total financial picture for themselves and their business. Speaking with a tax advisor and financial planner can help business owners determine which plan best aligns with their financial situation, retirement goals and business considerations. For more information, business owners can see IRS Publication 560, Retirement Plans for Small Business (SEP, SIMPLE, and Qualified Plans) .

If a plan meets the requirements for a traditional 401(k) (see Retirement Plans for Small Entities and Self-Employed on the IRS website for more information), participant contributions must be deposited as soon as they can reasonably be segregated from the employer’s general assets but in no event later than the 15th business day of the following month. If plans with fewer than 100 participants make deposits within seven business days of the participant salary deferral, they will have satisfied a safe harbor rule covering the timely deposit of participant contributions.

Employer contributions are generally due no later than the deadline for the employer’s federal tax return, including extensions.

Options available to sole proprietors

Sole proprietors may find that an individual retirement account, or traditional IRA , is one of the simplest ways to save money for retirement. It’s possible for sole proprietors to invest their contributions in stocks, mutual funds, ETFs and bonds, as well as certificates of deposit (CDs) and money market funds. Contributions are subject to limits, so sole proprietors should check the IRA Contribution Limits on the IRS website for the most up-to-date information on contribution limits.

Contributions to a traditional IRA may be tax deductible depending on the contributor’s modified adjusted gross income and federal tax filing status, but the earnings will always be tax deferred until distribution. A business owner also may make nondeductible contributions if they are above traditional IRA deductibility limits. The age at which one must start taking required minimum distributions (RMDs) is age 73. Plan participants are required to take an RMD by December 31 each year. A participant may delay their first RMD until April 1 in the year after they turn 73, but then they will be required to take two RMDs in that year. One may be subject to additional taxes if RMDs are missed. RMD rules can be complex, so business owners should consult their tax advisor regarding their specific situation.

Deductible contributions and all earnings are generally taxed as ordinary income when distributed, while nondeductible contributions are not because plan participants already paid taxes on them. An additional federal tax for early withdrawals applies to the taxable portion of distributions before age 59½ unless an exception applies.

With a Roth IRA, the same contribution limits apply, but contributions are not deductible. One’s ability to contribute directly to a Roth IRA depends on their modified adjusted gross income and filing status. When one makes qualified distributions from a Roth IRA, the distributions are not subject to federal income taxes and may be exempt from state taxes. Small business owners should consult their tax advisor about any state or local taxes that may apply.

  • Cost: Business owners can open a traditional IRA or Roth IRA with most brokerage or investment companies, and fees — though likely to be small — may vary. Although the IRS doesn’t require a minimum investment, some companies do.
  • Ease of setup: It is possible to open an IRA online within minutes. However, plan participants must make annual contributions by the federal tax return deadline, usually by April 15 not including extensions. If April 15, falls on a weekend or a holiday, the deadline is typically the next business day.
  • Tax advantages: Traditional IRAs and Roth IRAs both offer potential tax benefits but at different times. For a traditional IRA for which one has made a tax-deductible contribution, the advantages are generally immediate; with a Roth IRA, they may be in the future. When you make a Roth IRA contribution, it is not tax deductible, and the accountholder will not receive any immediate tax benefit, but qualified distributions will not be subject to federal tax. This may help the accountholder save on taxes if they are in a lower tax bracket at that point. Footnote [2]
  • Relatively low contribution limit: If a sole proprietor is a high earner and wishes to save more money for retirement and to potentially help maximize tax benefits, other options may be more beneficial. However, while the contribution limits in an IRA are less than in other plan types, if a small business owner has a retirement plan like a 401(k) with their company, they can supplement their plan savings with an IRA.

The individual 401(k) plan

For sole proprietors with no employees other than themselves (and a spouse), the individual 401(k) — also known as a solo 401(k) — potentially could let them put away more retirement savings than an IRA or a SEP IRA.

In an individual 401(k), a sole proprietor can contribute as both an employee and through their business. As an employee, they can make elective deferrals on a pre-tax basis up to 100% of earned income up to a certain dollar amount specified in the federal tax code and adjusted annually by the IRS. Maximum contribution limits are subject to change, so for the most current contribution limits, business owners should check out one-participant 401(k) plans on the IRS website.

Meanwhile, the company can contribute up to 25% of the sole proprietor’s compensation (or 20% of net earnings from self-employment) as an employer contribution. Total contributions, including those from the sole proprietor and the company, are limited to the lesser of 100% of earned income up to a certain dollar amount specified in the federal tax code and adjusted annually by the IRS. The sole proprietor’s spouse (if employed by the business) is also eligible to contribute to the company’s individual 401(k) plan.

With an individual 401(k), withdrawals taken before age 59½ are subject to regular income tax as well as an additional federal tax equal to 10% of the distribution unless an exception applies; withdrawals after that age are taxed as regular income. If a sole proprietor turned age 73 on or after January 1, 2023, the required beginning date for RMDs is April 1 of the year after they turn age 73, they are required to take an RMD by December 31 each year after that. If they delay their first RMD until April 1 in the year after they turn 73, they will be required to take two RMDs in that year. They may be subject to additional taxes if RMDs are missed. RMD rules can be complex, so business owners should consult their tax advisors regarding their specific situation.

  • Tax advantages: Elective deferrals up to the annual limit can be made on a pre-tax basis, potentially reducing a sole proprietor’s and their company’s taxable income. Any potential investment growth of their savings would be tax deferred. They also can set up their solo 401(k) with a Roth 401(k) option. In this case, employee contributions would be made on an after-tax basis, but earnings are not subject to federal income tax if withdrawals are made when they are at least 59½, or disabled or deceased and at least five years have elapsed between the first contribution to a Roth 401(k) account and the first withdrawal.
  • Borrowing: If the plan allows for this option, they may be able to borrow from their plan account. For more information on retirement plan loans, see the IRS page Retirement Plan FAQs regarding Loans .
  • Early withdrawals for certain exceptions: It is possible to take an early withdrawal from an individual 401(k) plan account without owing any additional tax in certain situations, such as a qualified birth or adoption or as a qualified disaster distribution. However, sole proprietors will have to pay taxes at their current tax rate to do so.
  • Paperwork: Over time, administering a plan can require a fair amount of paperwork, including filing Form 5500 annually with the IRS and Department of Labor when the plan’s total assets and the assets of other one-participant plans at the end of the plan year are more than $250,000. Additionally, “every few years, the law changes and you may need to amend your plan,” notes Anderson.

Sole proprietors or single-owner LLC s must make certain contributions by the individual federal tax filing deadline, including extensions. If a business is an S corporation, the business owner must make certain contributions by the S corporation federal tax filing deadline, including extensions.

Source: IRS, Retirement Plans for Small Business (SEP, SIMPLE and Qualified Plans) .

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With the Vanguard Retirement Investment Program (VRIP), you'll have one pooled account where you can add more than 100 Vanguard funds and other investments to your existing plan (if the plan allows). Your current third-party administrator or trustee will continue to manage recordkeeping and other day-to-day activities for your plan.

The program can be used to enhance any employer-sponsored retirement plan. You must already have a plan document in place before you enroll.

You can also contribute to and manage your investments completely online. 

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Who should invest

  • Small-business owners who already offer a retirement investment program.
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  • Employers who have or are forming a retirement plan that permits investment-only accounts at different providers.

A range of low-cost investments

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  • Vanguard sets up one account (a "pooled" account) for each fund your plan holds. The investment assets of all participants will be combined in each account. Your plan administrator keeps track of the contributions.
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*Vanguard average ETF and mutual fund expense ratio: 0.08%. Industry average ETF and mutual fund expense ratio: 0.47%. All averages are asset-weighted. Industry average excludes Vanguard. Sources: Vanguard and Morningstar, Inc., as of December 31, 2022.  View ETF performance .

For more information about Vanguard mutual funds or Vanguard ETFs, obtain a mutual fund or an ETF prospectus or, if available, a summary prospectus. Investment objectives, risks, charges, expenses, and other important information are contained in the prospectus; read and consider it carefully before investing.

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What Is a Solo 401(k)?

How the solo 401(k) works.

  • Who Is Eligible?

How to Set Up a Solo 401(k) Plan

  • Eligibility Requirements
  • Contribution Limits

Other 401(k) Plans

Contributions example, other benefits of a solo 401(k), the bottom line.

  • Retirement Planning

A 401(k) Plan for the Small Business Owner

The solo 401(k) plan is worth a look

retirement funds for small business owners

Roger Wohlner is an experienced financial writer, ghostwriter, and advisor with 20 years of experience in the industry.

retirement funds for small business owners

The 401(k) plan has gained popularity among small business owners ever since 2001 when some changes to federal tax law made it a better and more flexible choice for their needs compared with some other retirement savings options. These 401(k) plans are known as solo 401(k) or self-employed 401(k) plans.

Key Takeaways

  • A solo 401(k) plan—also called a self-employed 401(k)—is for businesses whose only eligible participants in the plan are its owners (and spouses).
  • These plans are often less complicated and cost less to set up.
  • If you have non-owner employees, they must not meet the eligibility requirements you select for the plan.
  • There are two components to a solo 401(k) plan: employee elective-deferral contributions and profit-sharing contributions.
  • A solo 401(k)s may also offer loans, doesn’t require nondiscrimination testing, and allows for the deduction of plan contributions of up to 25% of eligible compensation.

Solo 401(k)s are a retirement savings option for small businesses whose only eligible participants in the plan are the business owners (and their spouses if they are also employed by the business). It can be a smart way for someone who is a sole proprietor or an independent contractor to set aside a decent-sized nest egg for retirement.

Not content with the federal acronym, various financial institutions have their own names for the solo 401(k) plan. The independent 401(k) is one of the most generic. Other examples include:

  • The Individual(k)
  • Solo 401(k) or Solo-k
  • One-Participant k
  • Self-Employed 401(k)

If you are not sure which name your financial service provider uses, ask about the 401(k) plan for small business owners. The IRS provides a handy primer on such plans.

Who Is Eligible for Solo 401(k) Plans?

A common misconception about the solo 401(k) is that it can be used only by sole proprietors. In fact, the solo 401(k) plan may be used by any small businesses, including corporations, limited liability companies (LLCs), and partnerships. The only limitation is that the only eligible plan participants are the business owners and their spouses, provided they are employed by the business.

A person who works for one company (in which they have no ownership) and participates in its 401(k) can also establish a solo 401(k) for a small business they run on the side, funding it with earnings from that venture. However, the aggregate annual contributions to both plans cannot collectively exceed the Internal Revenue Service (IRS)-established maximums.

For small business owners who meet certain requirements, most financial institutions that offer retirement plan products have developed truncated versions of the regular 401(k) plan for use by business owners who want to adopt the solo 401(k).

As a result, less complex documentation is needed to establish the plan. Fees may also be relatively low. Make sure to receive the proper documentation from your financial services provider.

As noted above, the solo 401(k) plan may be adopted only by businesses in which the only employees eligible to participate in the plan are the business owners and eligible spouses. For eligibility purposes, a spouse is considered an owner of the business, so if a spouse is employed by the business, you are still eligible to adopt the solo 401(k).

If your business has non-owner employees who are eligible to participate in the plan, your business may not adopt the solo 401(k) plan. Therefore, if you have non-owner employees, they must not meet the eligibility requirements you select for the plan, which must remain within the following limitations.

You may exclude nonresident aliens from a solo 401(k) who receive no U.S. income and those who receive benefits under a collective-bargaining agreement.

Solo 401(k) Eligibility Requirements

Setting the wrong eligibility requirements could result in you being excluded from the plan or non-owner employees being eligible to participate in the plan.

For example, say you elect zero years of service as a requirement to participate, but you have five seasonal employees who work fewer than 1,000 hours each year. These employees would be eligible to participate in the plan because they meet the age and service requirements. Consequently, their eligibility would disqualify your business from being suitable to adopt the solo 401(k) plan. Instead, you could adopt a regular 401(k) plan.

Some solo 401(k) products, by definition, require further exclusions. Before you decide to establish a solo 401(k) plan, be sure to check with your financial services provider regarding its provisions.

Contribution Requirements

For 401(k) employee elective-deferral contributions you may require an employee to perform one year of service before becoming eligible to make elective-deferral contributions .

For profit-sharing contributions, you may require an employee to perform up to two years of service in order to be eligible to receive  profit-sharing contributions. However, most solo 401(k) plans will limit this requirement to one year.

For plan purposes, an employee is considered to have performed one year of service if they work at least 1,000 hours during the year. While you may generally choose to require fewer than 1,000 hours under a regular qualified plan, most solo 401(k) plans include a hard-coded limit of 1,000 hours.

Solo 401(k) Contribution Limits

There are two components to the solo 401(k) plan: employee elective-deferral contributions and profit-sharing contributions.

Employee Contribution Limits

You may make a salary-deferral contribution of up to 100% of your compensation but no more than the annual limit for the year. For 2023, the limit is $22,500 (increasing to $23,000 for 2024), plus $7,500 for people age 50 or over for both years.

Employer Contribution Limits

The business may contribute up to 25% of your compensation (calculations are required in the case of the self-employed) but no more than $66,000 for 2023 ($69,000 for 2024). An employee aged 50 or above can still contribute an additional $7,500 for 2023 and 2024.

In comparison with other popular retirement plans, the solo 401(k) plan has high contribution limits as outlined above, which is the key component that attracts owners of small businesses. Some other retirement plans also limit the contributions by employers or set lower limits on salary-deferred contributions.

The following is a summary of contribution comparisons for the employer plans generally used by small businesses.

As mentioned earlier, you may make employee elective-deferral contributions of up to 100% of your compensation but no more than the elective-deferral limit for the year. Profit-sharing contributions are limited to 25% of your compensation (or 20% of your modified net profit if your business is a sole proprietorship or partnership).

The total solo 401(k) contribution is the employee elective-deferral contribution plus the profit-sharing contribution—up to $66,000 for 2023 and 69,000 for 2024.

If your business is a corporation, the profit-sharing contribution is based on the W-2 wages you receive. If you receive $70,000 in W-2 wages, for instance, your profit-sharing contribution could be up to $17,500 ($70,000 x 25%). When added to a salary-deferral contribution of $19,000, the total would be $36,500.

If your business is a sole proprietorship or partnership, the calculation gets a little more involved. In this case, your profit-sharing contribution is based on your modified net profit and is limited to 20%. The IRS provides a step-by-step formula for determining your modified net profit in IRS Publication 560.

There are a number of other benefits that come with the Solo 401(k).

As with other qualified plans, you may be able to borrow from the solo 401(k) up to (1) the greater of $10,000 or 50% of the balance or (2) $50,000, whichever is less. Check the plan document to determine if any other limitations apply.  

5500 Filing May Not Be Required

Because the plan covers only the business owner, you may not be required to file Form 5500 series return unless your balance exceeds $250,000.

No Nondiscrimination Testing

Generally, certain nondiscrimination testing must be performed for 401(k) plans. These tests ensure that the business owners and higher-paid employees do not receive an inequitably high amount of contribution when compared with lower-paid employees.

Such tests can be very complex and may require the services of an experienced plan administrator , which can be costly. Because the solo 401(k) plan covers only the business owner, there is no one against whom you can discriminate, so these tests are not required.

Deducting Contributions

Similar to other employer plans, the solo 401(k) allows you to deduct plan contributions of up to 25% of eligible compensation. For plan purposes, compensation is limited to $330,000 in 2023 and $345,000 in 2024. Earnings over that amount are disregarded for plan purposes.

Can I Have a 401(k) for My LLC?

Yes, any business is able to set up a 401(k). If you are self-employed, you can create a solo 401(k) as a limited liability company (LLC)—assuming you meet all the other eligibility requirements.

What Is the Minimum Number of Employees Needed for a 401(k)?

A business of any size can offer a 401(k) plan. A solo 401(k) is for business owners with no employees.

How Much Can a Small Business Owner Contribute to a 401(k)?

The maximum contribution for a small business owner to a 401(k) for 2023 is $66,000 ($73,500 if you’re 50 or older)—which includes contributions as the employee and employer. For 2024, the contribution limit is $69,000, and $76,500 if you are 50 or older.

If you own more than one business, you must check with your tax professional to determine whether you are eligible to adopt the solo 401(k) . Ownership in another business that covers employees other than the business owner could result in your being ineligible for this type of plan.

Internal Revenue Service. " One-Participant 401(k) Plans ."

Internal Revenue Service. " Retirement Plans for Self-Employed People ."

Internal Revenue Service. " Tax Guide for Small Business (For Individuals Who Use Schedule C) .” Pages 2-3.

Internal Revenue Service. " Retirement Topics - 401(k) and Profit-Sharing Plan Contribution Limits ."

Internal Revenue Service. “ Election for Married Couples Unincorporated Businesses .”

Internal Revenue Service. “ 401(k) Plan Fix-It Guide - Eligible Employees Weren't Given the Opportunity to Make an Elective Deferral Election (Excluding Eligible Employees) .”

Internal Revenue Service. “ A Guide to Common Qualified Plan Requirements .”

Internal Revenue Service. “ 401(k) Plan Qualification Requirements .”

Internal Revenue Service. " 401(k) Limit Increases to $23,000 for 2024, IRA Limit Rises to $7,000 ."

Internal Revenue Service. " 2024 Limitations Adjusted as Provided in Section 415(d), etc ." Page 1.

Internal Revenue Service. " 2024 Limitations Adjusted as Provided in Section 415(d), etc ." Page 2.

Internal Revenue Service. “ Retirement Topics - SIMPLE IRA Contribution Limits .”

Internal Revenue Service. " Publication 560: Retirement Plans for Small Business (SEP, SIMPLE, and Qualified Plans) .” Page 6.

Internal Revenue Service. " Publication 560: Retirement Plans for Small Business (SEP, SIMPLE, and Qualified Plans) .” Page 12.

Internal Revenue Service. " Publication 560: Retirement Plans for Small Business (SEP, SIMPLE, and Qualified Plans) .” Page 23.

Internal Revenue Service. " Retirement Plans FAQs Regarding Loans ." Select "4. Under What Circumstances Can a Loan Be Taken From a Qualified Plan?"

Internal Revenue Service. " 401(k) Plan Fix-It Guide - The Plan Failed the 401(k) ADP and ACP Nondiscrimination Tests ."

Internal Revenue Service. " 401(k) Plan Overview ."

  • Self-Employment: Definition, Types, and Benefits 1 of 18
  • What Does It Mean to Be a Self-Employed Person? 2 of 18
  • Independent Contractor: Definition, How Taxes Work, and Example 3 of 18
  • What Is a Freelancer: Examples, Taxes, Benefits, and Drawbacks 4 of 18
  • Gig Economy: Definition, Factors Behind It, Critique & Gig Work 5 of 18
  • California Assembly Bill 5 (AB5): What's In It and What It Means 6 of 18
  • 5 Challenges for Self-Employed Finance Professionals 7 of 18
  • Best Health Insurance Companies for the Self-Employed 8 of 18
  • Choosing Disability Insurance for Self-Employed Individuals 9 of 18
  • How to Get a Mortgage When Self-Employed 10 of 18
  • Money Guide for Self-Employed Parents 11 of 18
  • How to Calculate Your Self-Employed Salary 12 of 18
  • How to Build Your Own Retirement Plan 13 of 18
  • How Social Security Works for the Self-Employed 14 of 18
  • Saving for Retirement When You Don't Have a Regular Job 15 of 18
  • Simplified Employee Pension (SEP) IRA: What It Is, How It Works 16 of 18
  • A 401(k) Plan for the Small Business Owner 17 of 18
  • SEP IRA vs. Solo 401(k): Which Is Better for Business Owners? 18 of 18

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I'm a financial planner with entrepreneur clients, and I recommend one of 5 different plans based on their business

Our experts answer readers' investing questions and write unbiased product reviews ( here's how we assess investing products ). Paid non-client promotion: In some cases, we receive a commission from our partners . Our opinions are always our own.

  • There are several retirement plans good for small business owners — including self-employed workers.
  • Each type of account has certain pros and cons and offers different requirements and limitations.
  • These decisions shouldn't be made lightly; a financial planner can help you find your best option.

Insider Today

Starting and operating a small business is no small feat. At some point every entrepreneur will face some common challenges. One of the most common questions I receive from my business owner clients is how to save for retirement .

Luckily, there are several retirement plan options to choose from. However, choosing the right plan depends on many factors such as the size of your business, the number of employees you have, and your financial goals. Here are five retirement plan options I recommend to my business owner clients.

The SEP IRA is one of the easiest retirement plan options to set up for small business owners. A SEP IRA can be utilized by business owners with any number of employees. However, if you have employees, be aware that you have to contribute the same percentage to your employee's account as you do to your own.

In 2024, employers may contribute up to 25% of wages or $69,000, whichever is less. A SEP IRA is easy to set up and has low maintenance costs and allows for pre-tax or Roth contributions. Contributions are not required each year, and they can be made up to the tax filing deadline, including extensions. Additionally, they may be used in addition to a traditional IRA or Roth IRA .

However, no catch-up contributions are allowed. You have to contribute the same percentage of compensation to your employee accounts as you do to your own, and employee contributions aren't allowed. The SEP IRA doesn't allow for loans and withdrawals — you generally can't access your funds penalty-free until age 59½, except for some rare exceptions.

2. Solo 401(k)

A solo 401(k) is a great retirement plan option for business owners with no employees (besides a spouse, potentially). Many entrepreneurs enjoy this option because it is like an employer-sponsored 401(k) that they may have had at a previous job. A solo 401(k) can be used in addition to a traditional IRA or a Roth IRA.

This plan allows you to make contributions as both the employer and the employee. In 2024, employees can contribute up to $23,000, or $30,500 if you are 50 or older. As the employer, you can make an additional contribution of up to 25% of compensation. The combined contribution limit is $69,000, or $76,500 for those 50 or older.

Like SEP IRAs, solo 401(k)s allow pre-tax and Roth contributions, but they also allow for employee loans and hardship withdrawals. Both employee and employer contributions are allowed, and employer contributions can be made up to the tax filing deadline, including extensions — employee contributions, though, generally need to be made before the end of the year.

Additionally, a solo 401(k) is more costly and complicated to set up, and it cannot be used if you hire employees. You'll also be required to report it to the IRS once your account balance reaches $250,000. You also can't access your funds penalty-free until age 59½ unless you meet one of the exceptions.

3. SIMPLE IRA

The is another retirement plan option for small business owners that is easy to set up. This option is available to small business owners with no more than 100 employees. In 2024, employees may contribute up to $16,000, or $19,500 for those age 50 and older. Employers must contribute to all their employees' SIMPLE IRA via one of two options.

Like the SEP IRA and solo 401(k), the SIMPLE IRA allows pre-tax and Roth contributions, and it can be used in addition to a traditional IRA or a Roth IRA. It's easy to set up and has low maintenance costs. It requires employer contributions (up to the tax filing deadline) and allows employee contributions (within 30 days after the end of the tax year). Again, you can't usually access funds penalty-free until age 59½.

4. Traditional IRA

A traditional IRA is one of the many available IRA retirement accounts that offer tax savings. Any small-business owner can open and fund this type of account. In 2024, the contribution limit is $7,000 per year ($8,000 if age 50 or older).

Contributions to this account are either pre-tax or after-tax depending on if you (or your spouse) are covered by an employer's plan and your adjusted gross income. If you or your spouse are covered by an employer's plan, then your contribution may be partially or non-tax deductible based on your income for that tax year .

5. Roth IRA

A Roth IRA is a retirement account that offers tax-free withdrawals in retirement funded by after-tax contributions. A small-business owner can open and fund this type of account if they are below the income thresholds defined by the IRS . Many small business owners choose to fund a Roth IRA during years when their income is below the threshold. In 2024, the contribution limit is $7,000 a year ($8,000 if age 50 or older).

One of the biggest tax benefits of the Roth IRA is that you can avoid paying taxes on your earnings. In addition, money in a Roth IRA is accessible penalty- and tax-free if your account has been open for at least five years.

There are many other limitations and features of each plan to consider before deciding. Small business owners should not take this decision lightly. You should carefully consider your overall financial and business goals before selecting a plan. Consulting with a financial advisor or CPA can help you determine the best retirement plan for your specific needs.

Earn Rewards on Your Everyday Business Expenses The best business credit cards can help you reinvest rewards into your business. The best cards offer high earning rates in the categories that your business spends the most in each month.

Watch: Mark Cuban explains why a 401(k) is a no-brainer

retirement funds for small business owners

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Retirement Plans for Small Business Owners: Choosing the Right Path

  • August 27, 2023
  • Entrepreneurship & Startups

retirement funds for small business owners

Are you a small business owner seeking the perfect retirement plan? Look no further! In this article, we will guide you through the maze of options and help you choose the right path.

Retirement planning is crucial, and with four options to consider – SEP IRA, SIMPLE IRA, Solo 401(k), and Defined Benefit Plan – it’s essential to find the plan that suits your needs.

So, let’s dive in and explore the world of retirement plans for small business owners together!

Table of Contents

Key Takeaways

  • Choosing the right retirement plan is crucial for small business owners.
  • Four retirement plans to consider are SEP IRA, SIMPLE IRA, Solo 401(k), and Defined Benefit Plan.
  • SEP IRA allows employers to contribute up to 25% of employee’s compensation.
  • SIMPLE IRA is easy to set up and maintain, with lower contribution limits.

The Importance of Retirement Planning for Small Business Owners

Choosing the right retirement plan is crucial for you as a small business owner. It ensures financial security for your future. As you navigate the complex world of retirement planning, it’s important to understand the role of financial advisors. They guide you towards the right path. These experts provide valuable insights and recommendations tailored to your specific needs and goals.

Additionally, it’s essential to consider the impact of inflation on your retirement savings. Inflation erodes the purchasing power of your money over time. So, it’s crucial to choose a retirement plan that offers potential growth and protection against inflation.

Understanding the Different Retirement Plan Options

Consider exploring the SEP IRA, SIMPLE IRA, Solo 401(k), and Defined Benefit Plan as potential retirement plan options.

Each plan has its own advantages and contribution limits that you should compare.

The SEP IRA allows employers to contribute up to 25% of an employee’s compensation, maximizing tax benefits.

The SIMPLE IRA is easy to set up and maintain, but it has lower contribution limits.

If you’re self-employed, the Solo 401(k) may be a better option with higher contribution limits.

Lastly, the Defined Benefit Plan offers a fixed retirement benefit, but it requires more administrative work.

Evaluating the Pros and Cons of SEP IRA

To evaluate the pros and cons of the SEP IRA, you should assess the potential tax benefits and contribution limits. Consider the following:

Tax advantages: Contributions to a SEP IRA are tax-deductible, reducing your taxable income. Additionally, the earnings grow tax-deferred until withdrawal, potentially saving you money in the long run.

Contribution limits: With a SEP IRA, you can contribute up to 25% of your compensation or $58,000 (whichever is less) in 2021. This high limit allows for substantial retirement savings.

Flexibility: SEP IRAs are easy to set up and maintain, making them a convenient option for small business owners. You can choose to contribute to your SEP IRA each year, based on your business’s financial performance.

When evaluating investment options, it’s important to consider the tax implications of SEP IRA contributions. Consult with a financial advisor to determine if this retirement plan aligns with your long-term goals and overall financial strategy.

Exploring the Benefits of SIMPLE IRA

When exploring retirement options, you’ll find that the SIMPLE IRA offers tax advantages and flexibility in contributions.

The SIMPLE IRA, which stands for Savings Incentive Match Plan for Employees Individual Retirement Account, is specifically designed for small business owners and sole proprietors.

With a SIMPLE IRA, employers have the option to match employee contributions or make a fixed contribution. This plan allows you to maximize tax benefits by making pre-tax contributions, which can potentially lower your taxable income.

Additionally, the contribution limits for a SIMPLE IRA are lower compared to other retirement plans, making it accessible for small businesses. To be eligible for a SIMPLE IRA, you must have 100 or fewer employees who earned at least $5,000 in the previous year.

Consider the SIMPLE IRA as a retirement fund option that offers both tax advantages and flexibility in contributions, making it an innovative choice for small business owners.

Maximizing Retirement Savings With Solo 401(K

If you’re a self-employed individual, the Solo 401(k) can allow you to maximize your retirement savings through higher contribution limits. Here’s how you can make the most of this retirement plan:

Maximize tax benefits: With a Solo 401(k), you can contribute both as an employer and employee, allowing you to potentially lower your taxable income and save more for retirement.

Investment strategies: The Solo 401(k) offers a wide range of investment options, including stocks, bonds, mutual funds, and even real estate. By diversifying your investments, you can potentially increase your returns and grow your retirement savings.

Take advantage of catch-up contributions: If you’re 50 years or older, you can make additional catch-up contributions to your Solo 401(k). This allows you to make up for any missed contributions and accelerate your retirement savings.

By understanding the benefits of the Solo 401(k) and implementing effective investment strategies, you can maximize your retirement savings while taking advantage of tax benefits.

Start planning for your future today!

Planning for the Future With a Defined Benefit Plan

Consider the Defined Benefit Plan for secure and stable retirement income as a small business owner. This retirement plan provides a fixed benefit based on factors such as salary history and years of service. It offers significant tax advantages and allows for maximizing tax benefits while managing investment risk.

To better understand the benefits of a Defined Benefit Plan, let’s take a look at the following table:

Employee Training and Its Impact on Retirement Plans

To maximize the impact of your employee training on your retirement options, it is important to focus on clear communication, engagement, and creating a supportive work environment. Here’s how you can make the most of your employee training:

Understand the costs: Determine if you or your employees are responsible for training costs. Some companies ask employees to contribute to training expenses, which can increase their buy-in and commitment to the program.

Foster employee engagement: Effective communication and engagement are key to ensuring that your employees fully participate in the training. Encourage open dialogue, provide opportunities for feedback, and recognize their efforts and achievements.

Create a supportive work environment: Building a supportive and inclusive work environment promotes employee buy-in. Offer resources and support to help employees apply their training knowledge, and provide opportunities for professional growth and advancement.

Fostering Employee Buy-in for Retirement Planning

Now that you understand the importance of employee training in retirement plans, let’s shift our focus to another crucial aspect: fostering employee buy-in for retirement planning.

Increasing employee engagement and incentivizing retirement savings are key strategies to ensure that your employees take an active role in planning for their future.

To increase employee engagement, it is essential to effectively communicate the benefits of retirement planning and the impact it can have on their financial well-being. Providing educational resources, such as workshops or online tools, can help employees understand the importance of saving for retirement and the various options available to them.

Incentivizing retirement savings can be done through employer matching contributions or offering additional benefits to employees who actively participate in their retirement plans. These incentives can serve as a motivator for employees to contribute more towards their retirement savings and take ownership of their financial future.

Remember, fostering employee buy-in for retirement planning requires a supportive and inclusive work environment where employees feel valued and supported in their financial goals.

Navigating Awkward Money Conversations in the Workplace

When discussing money matters in the workplace, it’s important to establish clear boundaries and policies to navigate those potentially awkward conversations. Handling awkward money conversations and addressing personal finance concerns in the workplace can be challenging, but with the right approach, you can create a positive and supportive environment.

Here are three key strategies to help you navigate these conversations:

Set clear policies: Establish guidelines that outline how financial discussions should be approached and what topics are appropriate for the workplace. This will provide a framework for addressing money matters and ensure everyone feels comfortable.

Encourage open communication: Foster an environment where employees feel safe discussing their financial concerns. Encourage empathy and understanding among colleagues to create a supportive atmosphere for these conversations.

Seek guidance when needed: If you encounter a particularly sensitive or complex money topic, don’t hesitate to reach out to HR or management for assistance. They can provide guidance and support in handling these conversations effectively.

Setting Boundaries for Personal Financial Discussions

Establishing clear boundaries is essential when discussing personal financial matters in the workplace. Promoting privacy and creating a respectful environment for money discussions can help maintain a positive work culture.

To set boundaries, start by clearly communicating expectations around personal financial conversations. Encourage employees to respect each other’s privacy and avoid prying into sensitive financial matters. It’s important to emphasize that personal financial decisions are personal and should not be judged or discussed without consent.

Implementing policies that protect confidentiality and confidentiality can also support privacy in the workplace. By promoting a culture of mutual respect and understanding, you can create a safe space for employees to navigate their financial matters without feeling uncomfortable or judged.

Setting boundaries and promoting privacy will contribute to a healthier work environment and foster innovation and productivity.

Establishing Clear Policies for Financial Matters

To establish clear policies for financial matters in your workplace, communicate expectations around personal financial conversations and emphasize the importance of respecting privacy and confidentiality. This will help create a culture of transparency and promote financial well-being among employees. Here are three key steps to establishing financial guidelines and promoting financial transparency:

Develop a comprehensive financial policy: Create a policy that outlines the expectations and boundaries when it comes to discussing personal finances at work. Clearly communicate what is acceptable and what is not, and provide guidance on how to handle sensitive financial topics.

Educate employees on financial literacy: Offer resources and workshops that empower employees to make informed financial decisions. Encourage them to seek professional advice and provide access to financial planning tools.

Foster an open and supportive environment: Encourage open communication about financial challenges and successes. Create a safe space for employees to discuss their financial goals and provide opportunities for collaboration and peer support.

Promoting Open Communication and Empathy About Money

Now that you have established clear policies for financial matters in your workplace, it is important to promote open communication and empathy about money. By doing so, you can address the financial concerns of your employees and promote financial literacy among your workforce.

Encourage your employees to openly discuss their financial challenges and goals, creating a safe space for dialogue. Provide resources and educational opportunities that can help your employees improve their financial well-being. Consider offering workshops or seminars on topics such as budgeting, saving, and investing.

Additionally, encourage empathy and understanding among your employees by fostering a supportive and inclusive work environment. This will not only help alleviate tension during money discussions but also create a culture of collaboration and support.

Seeking Assistance in Handling Sensitive Money Topics

If you’re unsure about handling sensitive money topics, seeking guidance from HR or management can provide you with the assistance you need. When it comes to discussing money matters in the workplace, creating a safe space is essential.

Here are three key ways to handle sensitive money topics effectively:

Establish a safe space: Foster an environment where employees feel comfortable discussing financial concerns without judgment or fear of repercussions. Encourage open and honest dialogue to promote trust and transparency.

Communicate with empathy: Approach money discussions with understanding and compassion. Recognize that everyone has different financial situations and challenges. Listen actively, validate their experiences, and offer support and resources where possible.

Provide resources and education: Offer financial wellness programs, workshops, or resources that can help employees navigate sensitive money topics. This shows your commitment to their financial well-being and creates opportunities for growth and empowerment.

Understanding the Basics of a SIMPLE IRA

Understanding the basics of a SIMPLE IRA can help you make informed decisions about your retirement savings.

A SIMPLE IRA, which stands for Savings Incentive Match Plan for Employees Individual Retirement Account, is a retirement plan designed specifically for small business owners and sole proprietors.

One of the benefits of a SIMPLE IRA is the tax advantages it offers. Contributions to a SIMPLE IRA are made on a pre-tax basis, meaning you don’t have to pay taxes on the money you contribute until you withdraw it during retirement. Additionally, employers have the option to match employee contributions or make a fixed contribution, providing even more potential for retirement savings.

However, it’s important to understand the contribution limits in a SIMPLE IRA. For 2023, the maximum employee contribution limit is $14,000, and those aged 50 and older can make an additional catch-up contribution of $3,000.

Frequently Asked Questions

How can small business owners determine the appropriate retirement plan for their specific needs and goals.

To determine the appropriate retirement plan for your needs and goals as a small business owner, consider factors like contribution limits, tax advantages, and flexibility. Seek professional guidance and evaluate options like SEP IRA, SIMPLE IRA, Solo 401(k), and Defined Benefit Plan.

Are There Any Tax Implications Associated With the Contributions Made to a SEP Ira?

There can be tax implications associated with SEP IRA contributions. For example, contributions are tax-deductible for the employer, and the employee’s earnings and contributions grow tax-deferred until withdrawal.

Can Employees Contribute to a SIMPLE IRA Plan on Their Own, or Is It Solely the Responsibility of the Employer?

Employees can contribute to a SIMPLE IRA plan on their own; it’s not solely the employer’s responsibility. This retirement plan allows employees to make contributions through salary deferrals, while employers have the option to match contributions.

What Are Some Potential Drawbacks or Limitations of a Solo 401(K) Retirement Plan for Self-Employed Individuals?

Drawbacks of a solo 401(k) for self-employed individuals include higher administrative fees, complexity in plan administration, and potential limitations on contributions based on income. These challenges may require professional assistance to navigate effectively.

How Does a Defined Benefit Plan Differ From Other Retirement Plan Options, and What Are the Advantages of Choosing This Type of Plan for Small Business Owners?

A defined benefit plan differs from other retirement plan options. It offers advantages for small business owners, such as guaranteed retirement income and potential tax deductions. Consider this plan for stability and long-term financial security.

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  • Topics - This chapter discusses:
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Eligible employee.

Excludable employees.

Formal written agreement.

When not to use Form 5305-SEP.

Information you must give to employees.

Setting up the employee's SEP-IRA.

Deadline for setting up a SEP.

Time limit for making contributions.

Contributions for yourself.

Annual compensation limit.

More than one plan.

Tax treatment of excess contributions.

Reporting on Form W-2.

Deduction Limit for Contributions for Participants

Deduction limit for self-employed individuals.

Excise tax.

When To Deduct Contributions

Where to deduct contributions.

Who can have a SARSEP?

SARSEP ADP test.

Deferral percentage.

Employee compensation.

Compensation of self-employed individuals.

Choice not to treat deferrals as compensation.

Catch-up contributions.

Overall limit on SEP contributions.

Figuring the elective deferral.

Excess deferrals.

Excess SEP contributions.

Distributions (Withdrawals)

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Effects on employee.

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Grace period for employers who cease to meet the 100-employee limit.

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Deadline for setting up a SIMPLE IRA plan.

Setting up a SIMPLE IRA.

Deadline for setting up a SIMPLE IRA.

Election period.

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Employer matching contributions.

Lower percentage.

Nonelective contributions.

Time limits for contributing funds.

More information.

More Information on SIMPLE IRA Plans

Employee notification.

Note on forms.

Profit-sharing plan.

Money purchase pension plan.

Defined Benefit Plan

Plan assets must not be diverted.

Minimum coverage requirement must be met.

Contributions or benefits must not discriminate.

Contributions and benefits must not be more than certain limits.

Minimum vesting standard must be met.

Participation.

Benefit payment must begin when required.

Early retirement.

Required minimum distributions (RMDs).

Survivor benefits.

Loan secured by benefits.

Waiver of survivor benefits.

Involuntary cash-out of benefits not more than dollar limit.

Consolidation, merger, or transfer of assets or liabilities.

Benefits must not be assigned or alienated.

Exception for certain loans.

Exception for a qualified domestic relations order (QDRO).

No benefit reduction for social security increases.

Elective deferrals must be limited.

Top-heavy plan requirements.

SIMPLE and safe harbor 401(k) plan exception.

Set-up deadline.

Written plan requirement.

IRS pre-approved plans.

Plan providers.

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Quarterly installments of required contributions.

Installment percentage.

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Employee Contributions

Employer's promissory note.

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Table 4-1. Carryover of Excess Contributions Illustrated—Profit-Sharing Plan (000's omitted)

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SIMPLE 401(k) plan.

Distributions.

Treatment of contributions.

Forfeiture.

Eligible automatic contribution arrangement (EACA).

Withdrawals.

Notice requirement.

Qualified automatic contribution arrangement (QACA).

Matching or nonelective contributions.

Vesting requirements.

Notice requirements.

Excess withdrawn by April 15.

Excess not withdrawn by April 15.

Reporting corrective distributions on Form 1099-R.

Tax on excess contributions of highly compensated employees.

Safe Harbor 401(k) Plan

Elective deferrals, reporting requirements.

Minimum distribution.

Required beginning date.

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Publication 560 - additional material, publication 560 (2022), retirement plans for small business, (sep, simple, and qualified plans).

For use in preparing 2022 Returns

Publication 560 - Introductory Material

For the latest information about developments related to Pub. 560, such as legislation enacted after it was published, go to IRS.gov/Pub560 .

Compensation limits for 2022 and 2023. For 2022, the maximum compensation used for figuring contributions and benefits is $305,000. This limit increases to $330,000 for 2023.

Elective deferral limits for 2022 and 2023. The limit on elective deferrals, other than catch-up contributions, is $20,500 for 2022 and $22,500 for 2023. These limits apply for participants in SARSEPs, 401(k) plans (excluding SIMPLE plans), section 403(b) plans, and section 457(b) plans.

Defined contribution limits for 2022 and 2023. The limit on contributions, other than catch-up contributions, for a participant in a defined contribution plan is $61,000 for 2022 and increases to $66,000 for 2023.

Defined benefit limits for 2022 and 2023. The limit on annual benefits for a participant in a defined benefit plan is $245,000 for 2022 and increases to $265,000 for 2023.

SIMPLE plan salary reduction contribution limits for 2022 and 2023. The limit on salary reduction contributions, other than catch-up contributions, is $14,000 for 2022 and increases to $15,500 for 2023.

Catch-up contribution limits for 2022 and 2023. A plan can permit participants who are age 50 or over at the end of the calendar year to make catch-up contributions in addition to elective deferrals and SIMPLE plan salary reduction contributions. The catch-up contribution limitation for defined contribution plans other than SIMPLE plans is $6,500 for 2022 and increases to $7,500 for 2023. The catch-up contribution limitation for SIMPLE plans is $3,000 for 2022 and increases to $3,500 for 2023.A participant's catch-up contributions for a year can't exceed the lesser of the following amounts.

The catch-up contribution limit.

The excess of the participant's compensation over the elective deferrals that aren’t catch-up contributions.

See Catch-up contributions under Contribution Limits and Limit on Elective Deferrals in chapters 3 and 4, respectively, for more information.

Required minimum distributions (RMDs). Individuals who reach age 72 after December 31, 2022, may delay receiving their required minimum distribution until April 1 of the year following the year in which they turn age 73. This change in the age for making these beginning required minimum distributions applies to both IRA owners and participants in a qualified retirement plan.

Consolidated Appropriations Act, 2023. The Consolidated Appropriations Act, 2023, P.L. 117-328, made changes to certain rules affecting SEP, SIMPLE, and qualified plans. Many of these rules are effective after December 29, 2022, and will be reflected in future editions of this publication.

Maximum age for traditional IRA contributions. The age restriction for contributions to a traditional IRA has been eliminated.

Small employer automatic enrollment credit. The Further Consolidated Appropriations Act, 2020, P.L. 116-94, added section 45T. An eligible employer may claim a tax credit if it includes an eligible automatic contribution arrangement under a qualified employer plan. The credit equals $500 per year over a 3-year period beginning with the first tax year in which it includes the automatic contribution arrangement, and may first be claimed on the employer’s return for the year 2020.

Increase in credit limitation for small employer plan startup costs. The Further Consolidated Appropriations Act, 2020, P.L. 116-94, amended section 45E. For tax years beginning after December 31, 2019, eligible employers can claim a tax credit for the first credit year and each of the 2 tax years immediately following. The credit equals 50% of qualified startup costs, up to the greater of (a) $500; or (b) the lesser of (i) $250 for each employee who is not a “highly compensated employee” eligible to participate in the employer plan, or (ii) $5,000.

The Consolidated Appropriations Act, 2023, P.L. 117-328, further amended section 45E to increase the credit for tax years beginning after December 31, 2022.

See the instructions for Form 3800 and Form 8881 for more information on the startup cost credit.

Restriction on conditions of participation. Effective for plan years beginning after December 31, 2020, a 401(k) plan can’t require, as a condition of participation, that an employee complete a period of service that extends beyond the close of the earlier of (1) 1 year of service, or (2) the first period of 3 consecutive 12‑month periods (excluding 12-month periods beginning before January 1, 2021) during each of which the employee has completed at least 500 hours of service. Effective for plan years beginning after December 31, 2024, 3 consecutive 12-month periods are reduced to 2 consecutive 12‑month periods.

Qualified automatic contribution arrangement (QACA) safe harbor plans. Effective for plan years beginning after December 31, 2019, when an employee doesn’t make an affirmative election specifying a deferral percentage, the maximum default deferral percentage increases from 10% to 15%.

Hardship distribution rules for section 401(k) plans. The Bipartisan Budget Act of 2018, P.L. 115-123, made the following hardship distribution rules for plan years beginning after December 31, 2018.

Removes the 6-month prohibition on contributions following a hardship distribution.

Permits hardship distributions to be made from contributions, earnings on contributions, and employer contributions.

Eliminates any requirement to take plan loans prior to taking a hardship distribution.

Retirement savings contributions credit. Retirement plan participants (including self-employed individuals) who make contributions to their plan may qualify for the retirement savings contribution credit. The maximum contribution eligible for the credit is $2,000. To take the credit, use Form 8880, Credit for Qualified Retirement Savings Contributions. For more information on who is eligible for the credit, retirement plan contributions eligible for the credit, and how to figure the credit, see Form 8880 and its instructions or go to IRS.gov/Retirement-Plans/Plan-Participant-Employee/Retirement-Savings-Contributions-Savers-Credit .

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Introduction

This publication discusses retirement plans you can set up and maintain for yourself and your employees. In this publication, “you” refers to the employer. See chapter 1 for the definition of the term “employer” and the definitions of other terms used in this publication. This publication covers the following types of retirement plans.

SEP (simplified employee pension) plans.

SIMPLE (savings incentive match plan for employees) plans.

Qualified plans (also called H.R. 10 plans or Keogh plans when covering self-employed individuals), including 401(k) plans.

SEP, SIMPLE, and qualified plans offer you and your employees a tax-favored way to save for retirement. You can deduct contributions you make to the plan for your employees. If you are a sole proprietor, you can deduct contributions you make to the plan for yourself. You can also deduct trustees' fees if contributions to the plan don't cover them. Earnings on the contributions are generally tax free until you or your employees receive distributions from the plan.

Under a 401(k) plan, employees can have you contribute limited amounts of their before-tax (after-tax, in the case of a qualified Roth contribution program) pay to the plan. These amounts (and the earnings on them) are generally tax free until your employees receive distributions from the plan or, in the case of a qualified distribution from a designated Roth account, completely tax free.

This publication contains the information you need to understand the following topics.

What type of plan to set up.

How to set up a plan.

How much you can contribute to a plan.

How much of your contribution is deductible.

How to treat certain distributions.

How to report information about the plan to the IRS and your employees.

Basic features of SEP, SIMPLE, and qualified plans. The key rules for SEP, SIMPLE, and qualified plans are outlined in Table 1 .

SEP plans provide a simplified method for you to make contributions to a retirement plan for yourself and your employees. Instead of setting up a profit-sharing or money purchase plan with a trust, you can adopt a SEP agreement and make contributions directly to a traditional individual retirement account or a traditional individual retirement annuity (SEP-IRA) set up for yourself and each eligible employee.

Generally, if you had 100 or fewer employees who received at least $5,000 in compensation last year, you can set up a SIMPLE IRA plan. Under a SIMPLE plan, employees can choose to make salary reduction contributions rather than receiving these amounts as part of their regular pay. In addition, you will contribute matching or nonelective contributions. The two types of SIMPLE plans are the SIMPLE IRA plan and the SIMPLE 401(k) plan.

The qualified plan rules are more complex than the SEP plan and SIMPLE plan rules. However, there are advantages to qualified plans, such as increased flexibility in designing plans and increased contribution and deduction limits in some cases.

Table 1. Key Retirement Plan Rules for 2022

Although the purpose of this publication is to provide general information about retirement plans you can set up for your employees, it doesn't contain all the rules and exceptions that apply to these plans. You may need professional help and guidance.

Also, this publication doesn't cover all the rules that may be of interest to employees. For example, it doesn't cover the following topics.

The comprehensive IRA rules an employee needs to know. These rules are covered in Pub. 590-A, Contributions to Individual Retirement Arrangements (IRAs), and Pub. 590-B, Distributions from Individual Retirement Arrangements (IRAs).

The comprehensive rules that apply to distributions from retirement plans. These rules are covered in Pub. 575, Pension and Annuity Income.

The comprehensive rules that apply to section 403(b) plans. These rules are covered in Pub. 571, Tax-Sheltered Annuity Plans (403(b) Plans) For Employees of Public Schools and Certain Tax-Exempt Organizations.

We welcome your comments about this publication and your suggestions for future editions.

You can send us comments through IRS.gov/FormComments . Or you can write to the Internal Revenue Service, Tax Forms and Publications, 1111 Constitution Ave. NW, IR-6526, Washington, DC 20224.

Although we can’t respond individually to each comment received, we do appreciate your feedback and will consider your comments and suggestions as we revise our tax forms, instructions, and publications. Don’t send tax questions, tax returns, or payments to the above address.

If you have a tax question not answered by this publication or the How To Get Tax Help section at the end of this publication, go to the IRS Interactive Tax Assistant page at IRS.gov/Help/ITA where you can find topics by using the search feature or viewing the categories listed.

Go to IRS.gov/Forms to download current and prior-year forms, instructions, and publications.

Go to IRS.gov/OrderForms to order current forms, instructions, and publications; call 800-829-3676 to order prior-year forms and instructions. The IRS will process your order for forms and publications as soon as possible. Don’t resubmit requests you’ve already sent us. You can get forms and publications faster online.

If you have a tax question not answered by this publication, check IRS.gov and How To Get Tax Help at the end of this publication.

1. Definitions You Need To Know

Certain terms used in this publication are defined below. The same term used in another publication may have a slightly different meaning.

Annual additions are the total of all your contributions in a year, employee contributions (not including rollovers), and forfeitures allocated to a participant's account.

Annual benefits are the benefits to be paid yearly in the form of a straight life annuity (with no extra benefits) under a plan to which employees don't contribute and under which no rollover contributions are made.

A business is an activity in which a profit motive is present and economic activity is involved. Service as a newspaper carrier under age 18 or as a public official isn’t a business.

A common-law employee is any individual who, under common law, would have the status of an employee. A leased employee can also be a common-law employee.

A common-law employee is a person who performs services for an employer who has the right to control and direct the results of the work and the way in which it is done. For example, the employer:

Provides the employee's tools, materials, and workplace; and

Can fire the employee.

Common-law employees aren't self-employed and can't set up retirement plans for income from their work, even if that income is self-employment income for social security tax purposes. For example, common-law employees who are ministers, members of religious orders, full-time insurance salespeople, and U.S. citizens employed in the United States by foreign governments can't set up retirement plans for their earnings from those employments, even though their earnings are treated as self-employment income.

However, an individual may be a common-law employee and a self-employed person as well. For example, an attorney can be a corporate common-law employee during regular working hours and also practice law in the evening as a self-employed person. In another example, a minister employed by a congregation for a salary is a common-law employee even though the salary is treated as self-employment income for social security tax purposes. However, fees reported on Schedule C (Form 1040), Profit or Loss From Business, for performing marriages, baptisms, and other personal services are self-employment earnings for qualified plan purposes.

Compensation for plan allocations is the pay a participant received from you for personal services for a year. You can generally define compensation as including all the following payments.

Wages and salaries.

Fees for professional services.

Other amounts received (cash or noncash) for personal services actually rendered by an employee, including, but not limited to, the following items.

Commissions and tips.

Fringe benefits.

For a self-employed individual, compensation means the earned income, discussed later, of that individual.

Compensation generally includes amounts deferred at the employee's election in the following employee benefit plans.

Section 401(k) plans.

Section 403(b) plans.

SIMPLE IRA plans.

Section 457 deferred compensation plans.

Section 125 cafeteria plans.

However, an employer can choose to exclude elective deferrals under the above plans from the definition of compensation. The limit on elective deferrals is discussed in chapter 2 under Salary Reduction Simplified Employee Pension (SARSEP) and in chapter 4.

In figuring the compensation of a participant, you can treat any of the following amounts as the employee's compensation.

The employee's wages as defined for income tax withholding purposes.

The employee's wages you report in box 1 of Form W-2, Wage and Tax Statement.

The employee's social security wages (including elective deferrals).

Compensation generally can't include either of the following items.

Nontaxable reimbursements or other expense allowances.

Deferred compensation (other than elective deferrals).

A special definition of compensation applies for SIMPLE plans. See chapter 3 .

A contribution is an amount you pay into a plan for all those participating in the plan, including self-employed individuals. Limits apply to how much, under the contribution formula of the plan, can be contributed each year for a participant.

A deduction is the plan contribution you can subtract from gross income on your federal income tax return. Limits apply to the amount deductible.

Earned income is net earnings from self-employment, discussed later, from a business in which your services materially helped to produce the income.

You can also have earned income from property your personal efforts helped create, such as royalties from your books or inventions. Earned income includes net earnings from selling or otherwise disposing of the property, but it doesn't include capital gains. It includes income from licensing the use of property other than goodwill.

Earned income includes amounts received for services by self-employed members of recognized religious sects opposed to social security benefits who are exempt from self-employment tax.

If you have more than one business, but only one has a retirement plan, only the earned income from that business is considered for that plan.

An elective deferral is the contribution made by employees to a qualified retirement plan.

Non-owner employees: The employee salary reduction/elective deferral contributions must be elected/made by the end of the tax year and deposited into the employee’s plan account within 7 business days (safe harbor) and no later than 15 days.

Owner/employees: The employee deferrals must be elected by the end of the tax year and can then be made by the tax return filing deadline, including extensions.

An employer is generally any person for whom an individual performs or did perform any service, of whatever nature, as an employee. A sole proprietor is treated as its own employer for retirement plan purposes. However, a partner isn't an employer for retirement plan purposes. Instead, the partnership is treated as the employer of each partner.

A highly compensated employee is an individual who:

Owned more than 5% of the interest in your business at any time during the year or the preceding year, regardless of how much compensation that person earned or received; or

For the preceding year, received compensation from you of more than $130,000 (if the preceding year is 2021 and increased to $135,000 for 2022), more than $150,000 (if the preceding year is 2023), and, if you so choose, was in the top 20% of employees when ranked by compensation.

A leased employee who isn't your common-law employee must generally be treated as your employee for retirement plan purposes if they do all the following.

Provides services to you under an agreement between you and a leasing organization.

Has performed services for you (or for you and related persons) substantially full time for at least 1 year.

Performs services under your primary direction or control.

A leased employee isn't treated as your employee if all the following conditions are met.

Leased employees aren't more than 20% of your non-highly compensated workforce.

The employee is covered under the leasing organization's qualified pension plan.

The leasing organization's plan is a money purchase pension plan that has all the following provisions.

Immediate participation. (This requirement doesn't apply to any individual whose compensation from the leasing organization in each plan year during the 4-year period ending with the plan year is less than $1,000.)

Full and immediate vesting.

A nonintegrated employer contribution rate of at least 10% of compensation for each participant.

For SEP and qualified plans, net earnings from self-employment are your gross income from your trade or business (provided your personal services are a material income-producing factor) minus allowable business deductions. Allowable deductions include contributions to SEP and qualified plans for common-law employees and the deduction allowed for the deductible part of your self-employment tax.

Net earnings from self-employment don’t include items excluded from gross income (or their related deductions) other than foreign earned income and foreign housing cost amounts.

For the deduction limits, earned income is net earnings for personal services actually rendered to the business. You take into account the income tax deduction for the deductible part of self-employment tax and the deduction for contributions to the plan made on your behalf when figuring net earnings.

Net earnings include a partner's distributive share of partnership income or loss (other than separately stated items, such as capital gains and losses). They don’t include income passed through to shareholders of S corporations. Guaranteed payments to limited partners are net earnings from self-employment if they are paid for services to or for the partnership. Distributions of other income or loss to limited partners aren't net earnings from self-employment.

For SIMPLE plans, net earnings from self-employment are the amount on line 4 ofSchedule SE (Form 1040), Self-Employment Tax, before subtracting any contributions made to the SIMPLE plan for yourself.

A qualified plan is a retirement plan that offers a tax-favored way to save for retirement. You can deduct contributions made to the plan for your employees. Earnings on these contributions are generally tax free until distributed at retirement. Profit-sharing, money purchase, and defined benefit plans are qualified plans. A 401(k) plan is also a qualified plan.

A participant is an eligible employee who is covered by your retirement plan. See the discussions, later, of the different types of plans for the definition of an employee eligible to participate in each type of plan.

A partner is an individual who shares ownership of an unincorporated trade or business with one or more persons. For retirement plans, a partner is treated as an employee of the partnership.

An individual in business for himself or herself, and whose business isn't incorporated, is self-employed. Sole proprietors and partners are self-employed. Self-employment can include part-time work.

Not everyone who has net earnings from self-employment for social security tax purposes is self-employed for qualified plan purposes. See Common-law employee and Net earnings from self-employment , earlier.

In addition, certain fishermen may be considered self-employed for setting up a qualified plan. See Pub. 595, Capital Construction Fund for Commercial Fishermen, for the special rules used to determine whether fishermen are self-employed.

A sole proprietor is an individual who owns an unincorporated business alone, including a single-member limited liability company that is treated as a disregarded entity for tax purposes. For retirement plans, a sole proprietor is treated as both an employer and an employee.

2. Simplified Employee Pensions (SEPs)

Setting up a sep.

How much can I contribute

Deducting contributions

Salary reduction simplified employee pensions (SARSEPs)

Distributions (withdrawals)

Additional taxes

Reporting and disclosure requirements

Useful Items

Publications

590-A Contributions to Individual Retirement Arrangements (IRAs)

590-B Distributions from Individual Retirement Arrangements (IRAs)

3998 Choosing a Retirement Solution for Your Small Business

4285 SEP Checklist

4286 SARSEP Checklist

4333 SEP Retirement Plans for Small Businesses

4336 SARSEP for Small Businesses

4407 SARSEP—Key Issues and Assistance

Forms (and Instructions)

W-2 Wage and Tax Statement

1040 U.S. Individual Income Tax Return

1040-SR U.S. Tax Return for Seniors

5305-SEP Simplified Employee Pension—Individual Retirement Accounts Contribution Agreement

5305A-SEP Salary Reduction Simplified Employee Pension—Individual Retirement Accounts Contribution Agreement

8880 Credit for Qualified Retirement Savings Contributions

8881 Credit for Small Employer Pension Plan Startup Costs

A SEP is a written plan that allows you to make contributions toward your own retirement and your employees' retirement without getting involved in a more complex qualified plan.

Under a SEP, you make contributions to a traditional individual retirement arrangement (called a SEP-IRA) set up by or for each eligible employee. A SEP-IRA is owned and controlled by the employee, and you make contributions to the financial institution where the SEP-IRA is maintained.

SEP-IRAs are set up for, at a minimum, each eligible employee (defined below). A SEP-IRA may have to be set up for a leased employee (defined in chapter 1), but doesn't need to be set up for excludable employees (defined later).

An eligible employee is an individual who meets all the following requirements.

Has reached age 21.

Has worked for you in at least 3 of the last 5 years.

Has received at least $650 in compensation from you in 2022. This amount increases to $750 in compensation in 2023.

The following employees can be excluded from coverage under a SEP.

Employees covered by a union agreement and whose retirement benefits were bargained for in good faith by the employees' union and you.

Nonresident alien employees who have received no U.S. source wages, salaries, or other personal services compensation from you. For more information about nonresident aliens, see Pub. 519, U.S. Tax Guide for Aliens.

There are three basic steps in setting up a SEP.

You must execute a formal written agreement to provide benefits to all eligible employees.

You must give each eligible employee certain information about the SEP.

A SEP-IRA must be set up by or for each eligible employee.

You must execute a formal written agreement to provide benefits to all eligible employees under a SEP. You can satisfy the written agreement requirement by adopting an IRS model SEP using Form 5305-SEP. However, see When not to use Form 5305-SEP , later.

If you adopt an IRS model SEP using Form 5305-SEP, no prior IRS approval or determination letter is required. Keep the original form. Don't file it with the IRS. Also, using Form 5305-SEP will usually relieve you from filing annual retirement plan information returns with the IRS and the Department of Labor. See the Form 5305-SEP instructions for details. If you choose not to use Form 5305-SEP, you should seek professional advice in adopting a SEP.

You can't use Form 5305-SEP if any of the following apply.

You currently maintain any other qualified retirement plan other than another SEP.

You have any eligible employees for whom IRAs haven’t been set up.

You use the services of leased employees, who aren't your common-law employees (as described in chapter 1).

You are a member of any of the following unless all eligible employees of all the members of these groups, trades, or businesses participate under the SEP.

An affiliated service group described in section 414(m).

A controlled group of corporations described in section 414(b).

Trades or businesses under common control described in section 414(c).

You don't pay the cost of the SEP contributions.

You must give each eligible employee a copy of Form 5305-SEP, its instructions, and the other information listed in the Form 5305-SEP instructions. An IRS model SEP isn't considered adopted until you give each employee this information.

A SEP-IRA must be set up by or for each eligible employee. SEP-IRAs can be set up with banks, insurance companies, or other qualified financial institutions. You send SEP contributions to the financial institution where the SEP-IRA is maintained.

You can set up a SEP for any year as late as the due date (including extensions) of your income tax return for that year.

How Much Can I Contribute?

The SEP rules permit you to contribute a limited amount of money each year to each employee's SEP-IRA. If you are self-employed, you can contribute to your own SEP-IRA. Contributions must be in the form of money (cash, check, or money order). You can't contribute property. However, participants may be able to transfer or roll over certain property from one retirement plan to another. See Pubs. 590-A and 590-B for more information about rollovers.

You don't have to make contributions every year. But if you make contributions, they must be based on a written allocation formula and must not discriminate in favor of highly compensated employees (defined in chapter 1). When you contribute, you must contribute to the SEP-IRAs of all participants who actually performed personal services during the year for which the contributions are made, including employees who die or terminate employment before the contributions are made.

Contributions are deductible within limits, as discussed later, and generally aren't taxable to the plan participants.

A SEP-IRA can't be a Roth IRA. Employer contributions to a SEP-IRA won’t affect the amount an individual can contribute to a Roth or traditional IRA.

Unlike regular contributions to a traditional IRA before 2020, contributions under a SEP can be made to participants over age 70½. If you are self-employed, you can also make contributions under the SEP for yourself even if you are over age 70½. Participants age 72 or over (if age 70½ was attained after December 31, 2019) must take RMDs.

Individuals who reach age 72 after December 31, 2022, may delay receiving their required minimum distribution until April 1 of the year following the year in which they turn age 73.

To deduct contributions for a year, you must make the contributions by the due date (including extensions) of your tax return for the year.

Contribution Limits

Contributions you make for 2022 to a common-law employee's SEP-IRA can't exceed the lesser of 25% of the employee's compensation or $61,000. Compensation generally doesn't include your contributions to the SEP. The SEP plan document will specify how the employer contribution is determined and how it will be allocated to participants.

Your employee has earned $21,000 for 2022 The maximum contribution you can make to your employee’s SEP-IRA is $5,250 (25% (0.25) x $21,000).

The annual limits on your contributions to a common-law employee's SEP-IRA also apply to contributions you make to your own SEP-IRA. However, special rules apply when figuring your maximum deductible contribution. See Deduction Limit for Self-Employed Individuals , later.

You can't consider the part of an employee's compensation over $305,000 when figuring your contribution limit for that employee. However, $61,000 is the maximum contribution for an eligible employee. These limits increase to $330,000 and $66,000, respectively, in 2023.

Your employee has earned $260,000 for 2022. Because of the maximum contribution limit for 2022, you can only contribute $61,000 to your employee’s SEP-IRA.

If you contribute to a defined contribution plan (defined in chapter 4), annual additions to an account are limited to the lesser of $61,000 or 100% of the participant's compensation. When you figure this limit, you must add your contributions to all defined contribution plans maintained by you. Because a SEP is considered a defined contribution plan for this limit, your contributions to a SEP must be added to your contributions to other defined contribution plans you maintain.

Excess contributions are your contributions to an employee's SEP-IRA (or to your own SEP-IRA) for 2022 that exceed the lesser of the following amounts.

25% of the employee's compensation (or, for you, 20% of your net earnings from self-employment).

Don't include SEP contributions on your employee's Form W-2 unless contributions were made under a salary reduction arrangement (discussed later).

Deducting Contributions

Generally, you can deduct the contributions you make each year to each employee's SEP-IRA. If you are self-employed, you can deduct the contributions you make each year to your own SEP-IRA.

The most you can deduct for your contributions to your or your employee's SEP-IRA is the lesser of the following amounts.

Your contributions (including any excess contributions carryover).

25% of the compensation (limited to $305,000 per participant) paid to the participants during 2022, from the business that has the plan, not to exceed $61,000 per participant.

If you contribute to your own SEP-IRA, you must make a special computation to figure your maximum deduction for these contributions. When figuring the deduction for contributions made to your own SEP-IRA, compensation is your net earnings from self-employment (defined in chapter 1), which takes into account both the following deductions.

The deduction for the deductible part of your self-employment tax.

The deduction for contributions to your own SEP-IRA.

The deduction for contributions to your own SEP-IRA and your net earnings depend on each other. For this reason, you determine the deduction for contributions to your own SEP-IRA indirectly by reducing the contribution rate called for in your plan. To do this, use the Rate Table for Self-Employed or the Rate Worksheet for Self-Employed, whichever is appropriate for your plan's contribution rate, in chapter 5. Then, figure your maximum deduction by using the Deduction Worksheet for Self-Employed in chapter 5.

Carryover of Excess SEP Contributions

If you made SEP contributions that are more than the deduction limit (nondeductible contributions), you can carry over and deduct the difference in later years. However, the carryover, when combined with the contribution for the later year, is subject to the deduction limit for that year. If you also contributed to a defined benefit plan or defined contribution plan, see Carryover of Excess Contributions under Employer Deduction in chapter 4 for the carryover limit.

If you made nondeductible (excess) contributions to a SEP, you may be subject to a 10% excise tax. For information about the excise tax, see Excise Tax for Nondeductible (Excess) Contributions under Employer Deduction in chapter 4.

When you can deduct contributions made for a year depends on the tax year for which the SEP is maintained.

If the SEP is maintained on a calendar-year basis, you deduct the yearly contributions on your tax return for the year within which the calendar year ends.

If you file your tax return and maintain the SEP using a fiscal year or short tax year, you deduct contributions made for a year on your tax return for that year.

You are a fiscal-year taxpayer whose tax year ends June 30. You maintain a SEP on a calendar-year basis. You deduct SEP contributions made for calendar year 2022 on your tax return for your tax year ending June 30, 2023.

Deduct the contributions you make for your common-law employees on your tax return. For example, sole proprietors deduct them on Schedule C (Form 1040) or Schedule F (Form 1040), Profit or Loss From Farming; partnerships deduct them on Form 1065, U.S. Return of Partnership Income; and corporations deduct them on Form 1120, U.S. Corporation Income Tax Return, or Form 1120-S, U.S. Income Tax Return for an S Corporation.

Sole proprietors and partners deduct contributions for themselves on line 15 of Schedule 1 (Form 1040). (If you are a partner, contributions for yourself are shown on the Schedule K-1 (Form 1065), Partner's Share of Income, Deductions, Credits, etc., you receive from the partnership.)

Salary Reduction Simplified Employee Pensions (SARSEPs)

A SARSEP is a SEP set up before 1997 that includes a salary reduction arrangement. (See the Caution next.) Under a SARSEP, your employees can choose to have you contribute part of their pay to their SEP-IRAs rather than receive it in cash. This contribution is called an elective deferral because employees choose (elect) to set aside the money, and they defer the tax on the money until it is distributed to them.

A SARSEP set up before 1997 is available to you and your eligible employees only if all the following requirements are met.

At least 50% of your employees eligible to participate choose to make elective deferrals.

You have 25 or fewer employees who were eligible to participate in the SEP at any time during the preceding year.

The elective deferrals of your highly compensated employees meet the SARSEP average deferral percentage (ADP) test.

Under the SARSEP ADP test, the amount deferred each year by each eligible highly compensated employee as a percentage of pay (the deferral percentage) can't be more than 125% of the ADP of all non-highly compensated employees eligible to participate. A highly compensated employee is defined in chapter 1.

The deferral percentage for an employee for a year is figured as follows.

For figuring the deferral percentage, compensation is generally the amount you pay to the employee for the year. Compensation includes the elective deferral and other amounts deferred in certain employee benefit plans. See Compensation in chapter 1. Elective deferrals under the SARSEP are included in figuring your employees' deferral percentage even though they aren't included in the income of your employees for income tax purposes.

If you are self-employed, compensation is your net earnings from self-employment as defined in chapter 1.

Compensation doesn't include tax-free items (or deductions related to them) other than foreign earned income and housing cost amounts.

You can choose not to treat elective deferrals (and other amounts deferred in certain employee benefit plans) for a year as compensation under your SARSEP.

Limit on Elective Deferrals

The most a participant can choose to defer for calendar year 2022 is the lesser of the following amounts.

25% of the participant's compensation (limited to $305,000 of the participant's compensation).

The $20,500 limit applies to the total elective deferrals the employee makes for the year to a SEP and any of the following.

Cash or deferred arrangement (section 401(k) plan).

Salary reduction arrangement under a tax-sheltered annuity plan (section 403(b) plan).

SIMPLE IRA plan.

In 2023, the $305,000 limit increases to $330,000, and the $20,500 limit increases to $22,500.

A SARSEP can permit participants who are age 50 or over at the end of the calendar year to also make catch-up contributions. The catch-up contribution limit is $6,500 for 2022 and increases to $7,500 for 2023. Elective deferrals aren't treated as catch-up contributions for 2022 until they exceed the elective deferral limit (the lesser of 25% of compensation or $20,500), the SARSEP ADP test limit discussed earlier, or the plan limit (if any). However, the catch-up contribution a participant can make for a year can't exceed the lesser of the following amounts.

The excess of the participant's compensation over the elective deferrals that aren't catch-up contributions.

Catch-up contributions aren't subject to the elective deferral limit (the lesser of 25% of compensation or $20,500 in 2022 and $22,500 in 2023).

If you also make nonelective contributions to a SEP-IRA, the total of the nonelective and elective contributions to that SEP-IRA can't exceed the lesser of 25% of the employee's compensation or $61,000 for 2022 ($66,000 for 2023). The same rule applies to contributions you make to your own SEP-IRA. See Contribution Limits , earlier.

For figuring the 25% limit on elective deferrals, compensation doesn't include SEP contributions, including elective deferrals or other amounts deferred in certain employee benefit plans.

Tax Treatment of Deferrals

Elective deferrals that aren't more than the limits discussed earlier under Limit on Elective Deferrals are excluded from your employees' wages subject to federal income tax in the year of deferral. However, these deferrals are included in wages for social security, Medicare, and federal unemployment (FUTA) tax.

For 2022, excess deferrals are the elective deferrals for the year that are more than the $20,500 limit discussed earlier. For a participant who is eligible to make catch-up contributions, excess deferrals are the elective deferrals that are more than $27,000. The treatment of excess deferrals made under a SARSEP is similar to the treatment of excess deferrals made under a qualified plan. See Treatment of Excess Deferrals under Elective Deferrals (401(k) Plans) in chapter 4.

Excess SEP contributions are elective deferrals of highly compensated employees that are more than the amount permitted under the SARSEP ADP test. You must notify your highly compensated employees within 2½ months after the end of the plan year of their excess SEP contributions. If you don't notify them within this time period, you must pay a 10% tax on the excess. For an explanation of the notification requirements, see Revenue Procedure 91-44, 1991-2 C.B. 733. If you adopted a SARSEP using Form 5305A-SEP, the notification requirements are explained in the instructions for that form.

Don’t include elective deferrals in the “Wages, tips, other compensation” box of Form W-2. You must, however, include them in the “Social security wages” and “Medicare wages and tips” boxes. You must also include them in box 12. Mark the “Retirement plan” checkbox in box 13. For more information, see the Form W-2 instructions.

As an employer, you can't prohibit distributions from a SEP-IRA. Also, you can't make your contributions on the condition that any part of them must be kept in the account after you have made your contributions to the employee's accounts.

Distributions are subject to IRA rules. Generally, you or your employee must begin to receive distributions from a SEP-IRA by April 1 of the first year after the calendar year in which you or your employee reaches age 72 (if age 70½ was attained after December 31, 2019). For more information about IRA rules, including the tax treatment of distributions, rollovers, required distributions, and income tax withholding, see Pubs. 590-A and 590-B.

Additional Taxes

The tax advantages of using SEP-IRAs for retirement savings can be offset by additional taxes that may be imposed for all the following actions.

Making excess contributions.

Making early withdrawals.

Not making required withdrawals.

For information about these taxes, see Pubs. 590-A and 590-B. Also, a SEP-IRA may be disqualified, or an excise tax may apply, if the account is involved in a prohibited transaction, discussed next.

If an employee improperly uses their SEP-IRA, such as by borrowing money from it, the employee has engaged in a prohibited transaction. In that case, the SEP-IRA will no longer qualify as an IRA. For a list of prohibited transactions, see Prohibited Transactions in chapter 4.

If a SEP-IRA is disqualified because of a prohibited transaction, the assets in the account will be treated as having been distributed to the employee on the first day of the year in which the transaction occurred. The employee must include in income the fair market value of the assets (on the first day of the year) that is more than any cost basis in the account. Also, the employee may have to pay the additional tax for making early withdrawals.

If you set up a SEP using Form 5305-SEP, you must give your eligible employees certain information about the SEP when you set it up. See Setting Up a SEP , earlier. Also, you must give your eligible employees a statement each year showing any contributions to their SEP-IRAs. You must also give them notice of any excess contributions. For details about other information you must give them, see the instructions for Form 5305-SEP or Form 5305A-SEP (for a salary reduction SEP).

Even if you didn't use Form 5305-SEP or Form 5305A-SEP to set up your SEP, you must give your employees information similar to that described above. For more information, see the instructions for either Form 5305-SEP or Form 5305A-SEP.

3. SIMPLE Plans

SIMPLE IRA plans

SIMPLE 401(k) plans

4284 SIMPLE IRA Plan Checklist

4334 SIMPLE IRA Plans for Small Businesses

5304-SIMPLE Savings Incentive Match Plan for Employees of Small Employers (SIMPLE)—Not for Use With a Designated Financial Institution

5305-SIMPLE Savings Incentive Match Plan for Employees of Small Employers (SIMPLE)—for Use With a Designated Financial Institution

8881 Credit for Small Employer Pension Plan Startup Costs and Auto Enrollment

A SIMPLE plan is a written arrangement that provides you and your employees with a simplified way to make contributions to provide retirement income. Under a SIMPLE plan, employees can choose to make salary reduction contributions to the plan rather than receiving these amounts as part of their regular pay. In addition, you will contribute matching or nonelective contributions.

SIMPLE plans can only be maintained on a calendar-year basis.

A SIMPLE plan can be set up in either of the following ways.

Using SIMPLE IRAs (SIMPLE IRA plan).

As part of a 401(k) plan (SIMPLE 401(k) plan).

SIMPLE IRA Plan

A SIMPLE IRA plan is a retirement plan that uses a SIMPLE IRA for each eligible employee. Under a SIMPLE IRA plan, a SIMPLE IRA must be set up for each eligible employee. For the definition of an eligible employee, see Who Can Participate in a SIMPLE IRA Plan , later.

Who Can Set up a SIMPLE IRA Plan?

You can set up a SIMPLE IRA plan if you meet both the following requirements.

You meet the employee limit.

You don't maintain another qualified plan unless the other plan is for collective bargaining employees.

You can set up a SIMPLE IRA plan only if you had 100 or fewer employees who received $5,000 or more in compensation from you for the preceding year. Under this rule, you must take into account all employees employed at any time during the calendar year regardless of whether they are eligible to participate. Employees include self-employed individuals who received earned income and leased employees (defined in chapter 1).

Once you set up a SIMPLE IRA plan, you must continue to meet the 100-employee limit each year you maintain the plan.

If you maintain the SIMPLE IRA plan for at least 1 year and you cease to meet the 100-employee limit in a later year, you will be treated as meeting it for the 2 calendar years immediately following the calendar year for which you last met it.

A different rule applies if you don't meet the 100-employee limit because of an acquisition, disposition, or similar transaction. Under this rule, the SIMPLE IRA plan will be treated as meeting the 100-employee limit for the year of the transaction and the 2 following years if both the following conditions are satisfied.

Coverage under the plan hasn’t significantly changed during the grace period.

The SIMPLE IRA plan would have continued to qualify after the transaction if you had remained a separate employer.

The SIMPLE IRA plan must generally be the only retirement plan to which you make contributions, or to which benefits accrue, for service in any year beginning with the year the SIMPLE IRA plan becomes effective.

If you maintain a qualified plan for collective bargaining employees, you are permitted to maintain a SIMPLE IRA plan for other employees.

Who Can Participate in a SIMPLE IRA Plan?

Any employee who received at least $5,000 in compensation during any 2 years preceding the current calendar year and is reasonably expected to receive at least $5,000 during the current calendar year is eligible to participate. The term “employee” includes a self-employed individual who received earned income.

You can use less restrictive eligibility requirements (but not more restrictive ones) by eliminating or reducing the prior year compensation requirements, the current year compensation requirements, or both. For example, you can allow participation for employees who received at least $3,000 in compensation during any preceding calendar year. However, you can't impose any other conditions for participating in a SIMPLE IRA plan.

The following employees don't need to be covered under a SIMPLE IRA plan.

Employees who are covered by a union agreement and whose retirement benefits were bargained for in good faith by the employees' union and you.

Nonresident alien employees who have received no U.S. source wages, salaries, or other personal services compensation from you.

Compensation for employees is the total wages, tips, and other compensation from the employer subject to federal income tax withholding and the amounts paid for domestic service in a private home, local college club, or local chapter of a college fraternity or sorority. Compensation also includes the employee's salary reduction contributions made under this plan and, if applicable, elective deferrals under a section 401(k) plan, a SARSEP, or a section 403(b) annuity contract and compensation deferred under a section 457 plan required to be reported by the employer on Form W-2. If you are self-employed, compensation is your net earnings from self-employment (line 4 of Schedule SE (Form 1040), before subtracting any contributions made to the SIMPLE IRA plan for yourself.

How To Set up a SIMPLE IRA Plan

You can use Form 5304-SIMPLE or Form 5305-SIMPLE to set up a SIMPLE IRA plan. Each form is a model SIMPLE plan document. Which form you use depends on whether you select a financial institution or your employees select the institution that will receive the contributions.

Use Form 5304-SIMPLE if you allow each plan participant to select the financial institution for receiving their SIMPLE IRA plan contributions. Use Form 5305-SIMPLE if you require that all contributions under the SIMPLE IRA plan be deposited initially at a designated financial institution.

The SIMPLE IRA plan is adopted when you have completed all appropriate boxes and blanks on the form and you (and the designated financial institution, if any) have signed it. Keep the original form. Don’t file it with the IRS.

If you set up a SIMPLE IRA plan using Form 5304-SIMPLE or Form 5305-SIMPLE, you can use the form to satisfy other requirements, including the following.

Meeting employer notification requirements for the SIMPLE IRA plan. Form 5304-SIMPLE and Form 5305-SIMPLE contain a Model Notification to Eligible Employees that provides the necessary information to the employee.

Maintaining the SIMPLE IRA plan records and proving you set up a SIMPLE IRA plan for employees.

You can set up a SIMPLE IRA plan effective on any date from January 1 through October 1 of a year, provided you didn't previously maintain a SIMPLE IRA plan. This requirement doesn't apply if you are a new employer that comes into existence after October 1 of the year the SIMPLE IRA plan is set up and you set up a SIMPLE IRA plan as soon as administratively feasible after your business comes into existence. If you previously maintained a SIMPLE IRA plan, you can set up a SIMPLE IRA plan effective only on January 1 of a year. A SIMPLE IRA plan can't have an effective date that is before the date you actually adopt the plan.

SIMPLE IRAs are the individual retirement accounts or annuities into which the contributions are deposited. A SIMPLE IRA must be set up for each eligible employee. Forms 5305-S, SIMPLE Individual Retirement Trust Account, and 5305-SA, SIMPLE Individual Retirement Custodial Account, are model trust and custodial account documents the participant and the trustee (or custodian) can use for this purpose.

A SIMPLE IRA can't be a Roth IRA. Contributions to a SIMPLE IRA won't affect the amount an individual can contribute to a Roth or traditional IRA.

A SIMPLE IRA must be set up for an employee before the first date by which a contribution is required to be deposited into the employee's IRA. See Time limits for contributing funds , later, under Contribution Limits .

Notification Requirement

If you adopt a SIMPLE IRA plan, you must notify each employee of the following information before the beginning of the election period.

The employee's opportunity to make or change a salary reduction choice under a SIMPLE IRA plan.

Your decision to make either matching contributions or nonelective contributions (discussed later).

A summary description provided by the financial institution.

Written notice that their balance can be transferred without cost or penalty if they use a designated financial institution.

The election period is generally the 60-day period immediately preceding January 1 of a calendar year (November 2 to December 31 of the preceding calendar year). However, the dates of this period are modified if you set up a SIMPLE IRA plan mid-year (for example, on July 1) or if the 60-day period falls before the first day an employee becomes eligible to participate in the SIMPLE IRA plan.

A SIMPLE IRA plan can provide longer periods for permitting employees to enter into salary reduction agreements or to modify prior agreements. For example, a SIMPLE IRA plan can provide a 90-day election period instead of the 60-day period. Similarly, in addition to the 60-day period, a SIMPLE IRA plan can provide quarterly election periods during the 30 days before each calendar quarter, other than the first quarter of each year.

Contributions are made up of salary reduction contributions and employer contributions. You, as the employer, must make either matching contributions or nonelective contributions, defined later. No other contributions can be made to the SIMPLE IRA plan. These contributions, which you can deduct, must be made timely. See Time limits for contributing funds , later.

The amount the employee chooses to have you contribute to a SIMPLE IRA on their behalf can't be more than $14,000 for 2022 and increases to $15,500 for 2023. These contributions must be expressed as a percentage of the employee's compensation unless you permit the employee to express them as a specific dollar amount. You can't place restrictions on the contribution amount (such as limiting the contribution percentage), except to comply with the $14,000 limit for 2022 ($15,500 for 2023).

If you or an employee participates in any other qualified plan during the year and you or your employee has salary reduction contributions (elective deferrals) under those plans, the salary reduction contributions under a SIMPLE IRA plan also count toward the overall annual limit ($20,500 for 2022; $22,500 for 2023) on exclusion of salary reduction contributions and other elective deferrals.

A SIMPLE IRA plan can permit participants who are age 50 or over at the end of the calendar year to also make catch-up contributions. The catch-up contribution limit for SIMPLE IRA plans is $3,000 for 2022 and increases to $3,500 for 2023. Salary reduction contributions aren't treated as catch-up contributions until they exceed $14,000 for 2022 ($15,500 for 2023). However, the catch-up contribution a participant can make for a year can't exceed the lesser of the following amounts.

The excess of the participant's compensation over the salary reduction contributions that aren't catch-up contributions.

You are generally required to match each employee's salary reduction contribution(s) on a dollar-for-dollar basis up to 3% of the employee's compensation, where only employees who have elected to make contributions will receive an employer matching contribution. This requirement doesn't apply if you make nonelective contributions, as discussed later.

In 2022, your employee earned $25,000 and chose to defer 5% of their salary. The net earnings from self-employment are $40,000, and you choose to contribute 10% of your earnings to your SIMPLE IRA. You make 3% matching contributions. The total contribution made for the employee is $2,000, figured as follows.

The total contribution you make for yourself is $5,200, figured as follows.

If you choose a matching contribution less than 3%, the percentage must be at least 1%. You must notify the employees of the lower match within a reasonable period of time before the 60-day election period (discussed earlier) for the calendar year. You can't choose a percentage less than 3% for more than 2 years during the 5-year period that ends with (and includes) the year for which the choice is effective.

Instead of matching contributions, you can choose to make nonelective contributions of 2% of compensation on behalf of each eligible employee who has at least $5,000 (or some lower amount you select) of compensation from you for the year. If you make this choice, you must make nonelective contributions whether or not the employee chooses to make salary reduction contributions. Only $305,000 of the employee's compensation can be taken into account to figure the contribution limit in 2022 ($330,000 in 2023).

If you choose this 2% contribution formula, you must notify the employees within a reasonable period of time before the 60-day election period (discussed earlier) for the calendar year.

In 2022, your employee, Jane Wood, earned $36,000 and chose to have you contribute 10% of her salary. Your net earnings from self-employment are $50,000, and you choose to contribute 10% of your earnings to your SIMPLE IRA. You make a 2% nonelective contribution. Both of you are under age 50. The total contribution you make for Jane is $4,320, figured as follows.

The total contribution you make for yourself is $6,000, figured as follows.

Using the same facts as in Example 1 above, the maximum contribution you make for Jane or for yourself if you each earned $75,000 is $14,000, figured as follows.

You must make the salary reduction contributions to the SIMPLE IRA within 30 days after the end of the month in which the amounts would have otherwise have been payable to the employee in cash. You must make matching contributions or nonelective contributions by the due date (including extensions) for filing your federal income tax return for the year. Certain plans subject to Department of Labor rules may have an earlier due date for salary reduction contributions.

You can deduct SIMPLE IRA contributions in the tax year within which the calendar year for which contributions were made ends. You can deduct contributions for a particular tax year if they are made for that tax year and are made by the due date (including extensions) of your federal income tax return for that year.

The due date for making contributions for 2022 for most plans is Monday, April 17, 2023.

Your tax year is the fiscal year ending June 30. Contributions under a SIMPLE IRA plan for calendar year 2022 (including contributions made in 2022 before July 1, 2022) are deductible in the tax year ending June 30, 2023.

You are a sole proprietor whose tax year is the calendar year. Contributions under a SIMPLE IRA plan for the calendar year 2022 (including contributions made in 2023 by April 17, 2023) are deductible in the 2022 tax year.

Deduct the contributions you make for your common-law employees on your tax return. For example, sole proprietors deduct them on Schedule C (Form 1040) or Schedule F (Form 1040), partnerships deduct them on Form 1065, and corporations deduct them on Form 1120 or Form 1120-S.

Sole proprietors and partners deduct contributions for themselves on line 15 of Schedule 1 (Form 1040). (If you are a partner, contributions for yourself are shown on the Schedule K-1 (Form 1065) you receive from the partnership.)

Tax Treatment of Contributions

You can deduct your contributions and your employees can exclude these contributions from their gross income. SIMPLE IRA plan contributions aren't subject to federal income tax withholding. However, salary reduction contributions are subject to social security, Medicare, and FUTA taxes. Matching and nonelective contributions aren't subject to these taxes.

Don’t include SIMPLE IRA plan contributions in the “Wages, tips, other compensation” box of Form W-2. You must, however, include them in the “Social security wages” and “Medicare wages and tips” boxes. You must also include them in box 12. Mark the “Retirement plan” checkbox in box 13. For more information, see the Form W-2 instructions.

Distributions from a SIMPLE IRA are subject to IRA rules and are generally includible in income for the year received. Tax-free rollovers can be made from one SIMPLE IRA into another SIMPLE IRA. However, a rollover from a SIMPLE IRA to a non-SIMPLE IRA can be made tax free only after a 2-year participation in the SIMPLE IRA plan.

Generally, you or your employee must begin to receive distributions from a SIMPLE IRA by April 1 of the first year after the calendar year in which you or your employee reaches age 72 (if age 70½ was attained after December 31, 2019).

Early withdrawals are generally subject to a 10% additional tax. However, the additional tax is increased to 25% if funds are withdrawn within 2 years of beginning participation.

See Pubs. 590-A and 590-B for information about IRA rules, including those on the tax treatment of distributions, rollovers, required distributions, and income tax withholding.

If you need help to set up or maintain a SIMPLE IRA plan, go to the IRS website and search SIMPLE IRA Plan .

SIMPLE 401(k) Plan

You can adopt a SIMPLE plan as part of a 401(k) plan if you meet the 100-employee limit, as discussed earlier under SIMPLE IRA Plan. A SIMPLE 401(k) plan is a qualified retirement plan and must generally satisfy the rules discussed under Qualification Rules in chapter 4, including the required distribution rules. However, a SIMPLE 401(k) plan isn't subject to the nondiscrimination and top-heavy rules discussed in chapter 4 if the plan meets the conditions listed below.

Under the plan, an employee can choose to have you make salary reduction contributions for the year to a trust in an amount expressed as a percentage of the employee's compensation, but not more than $14,000 for 2022 ($15,500 for 2023). If permitted under the plan, an employee who is age 50 or over can also make a catch-up contribution of up to $3,000 for 2022 and increases to $3,500 for 2023. See Catch-up contributions , earlier, under Contribution Limits.

You must make either:

Matching contributions up to 3% of compensation for the year, or

Nonelective contributions of 2% of compensation on behalf of each eligible employee who has at least $5,000 of compensation from you for the year.

No other contributions can be made to the trust.

No contributions are made, and no benefits accrue, for services during the year under any other qualified retirement plan sponsored by you on behalf of any employee eligible to participate in the SIMPLE 401(k) plan.

The employee's rights to any contributions are nonforfeitable.

No more than $305,000 of the employee's compensation can be taken into account in figuring matching contributions and nonelective contributions in 2022 ($330,000 in 2023). Compensation is defined earlier in this chapter.

The notification requirement that applies to SIMPLE IRA plans also applies to SIMPLE 401(k) plans. See Notification Requirement , earlier in this chapter.

Please note that Forms 5304-SIMPLE and 5305-SIMPLE can’t be used to establish a SIMPLE 401(k) plan. To set up a SIMPLE 401(k) plan, see Adopting a Written Plan in chapter 4.

4. Qualified Plans

Kinds of plans

Qualification rules

Setting up a qualified plan

Minimum funding requirement

Contributions

Employer deduction

Elective deferrals (401(k) plans)

Qualified Roth contribution program

Distributions

Prohibited transactions

Reporting requirements

575 Pension and Annuity Income

3066 Have you had your check-up this year? for Retirement Plans

4222 401(k) Plans for Small Businesses

4530 Designated Roth Accounts under a 401(k), 403(b) or governmental 457(b) plan

4531 401(k) Plan Checklist

4674 Automatic Enrollment 401(k) Plans for Small Businesses

4806 Profit Sharing Plans for Small Businesses

Schedule K-1 (Form 1065) Partner's Share of Income, Deductions, Credits, etc.

1099-R Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc.

Schedule C (Form 1040) Profit or Loss From Business

Schedule F (Form 1040) Profit or Loss From Farming

5300 Application for Determination for Employee Benefit Plan

5310 Application for Determination for Terminating Plan

5329 Additional Taxes on Qualified Plans (Including IRAs) and Other Tax-Favored Accounts

5330 Return of Excise Taxes Related to Employee Benefit Plans

5500 Annual Return/Report of Employee Benefit Plan

5500-EZ Annual Return of A One-Participant (Owners/Partners and Their Spouses) Retirement Plan or A Foreign Plan

5500-SF Short Form Annual Return/Report of Small Employee Benefit Plan

8717 User Fee for Employee Plan Determination Letter Request

8955-SSA Annual Registration Statement Identifying Separated Participants With Deferred Vested Benefits

These qualified retirement plans set up by self-employed individuals are sometimes called Keogh or H.R. 10 plans. A sole proprietor or a partnership can set up one of these plans. A common-law employee or a partner can't set up one of these plans. The plans described here can also be set up and maintained by employers that are corporations. All of the rules discussed here apply to corporations except where specifically limited to the self-employed.

The plan must be for the exclusive benefit of employees or their beneficiaries. These qualified plans can include coverage for a self-employed individual.

As an employer, you can usually deduct, subject to limits, contributions you make to a qualified plan, including those made for your own retirement. The contributions (and earnings and gains on them) are generally tax free until distributed by the plan.

Kinds of Plans

There are two basic kinds of qualified plans—defined contribution plans and defined benefit plans—and different rules apply to each. You can have more than one qualified plan, but your contributions to all the plans must not total more than the overall limits discussed under Contributions and Employer Deduction , later.

Defined Contribution Plan

A defined contribution plan provides an individual account for each participant in the plan. It provides benefits to a participant largely based on the amount contributed to that participant's account. Benefits are also affected by any income, expenses, gains, losses, and forfeitures of other accounts that may be allocated to an account. A defined contribution plan can be either a profit-sharing plan or a money purchase pension plan.

Although it is called a profit-sharing plan, you don’t actually have to make a business profit for the year in order to make a contribution (except for yourself if you are self-employed, as discussed under Self-employed individual , later). A profit-sharing plan can be set up to allow for discretionary employer contributions, meaning the amount contributed each year to the plan isn't fixed. An employer may even make no contribution to the plan for a given year.

The plan must provide a definite formula for allocating the contribution among the participants and for distributing the accumulated funds to the employees after they reach a certain age, after a fixed number of years, or upon certain other occurrences.

In general, you can be more flexible in making contributions to a profit-sharing plan than to a money purchase pension plan (discussed next) or a defined benefit plan (discussed later).

Contributions to a money purchase pension plan are fixed and aren't based on your business profits. For example, a money purchase pension plan may require that contributions be 10% of the participants' compensation without regard to whether you have profits (or the self-employed person has earned income).

A defined benefit plan is any plan that isn't a defined contribution plan. Contributions to a defined benefit plan are based on what is needed to provide definitely determinable benefits to plan participants. Actuarial assumptions and computations are required to figure these contributions. Generally, you will need continuing professional help to have a defined benefit plan.

Qualification Rules

To qualify for the tax benefits available to qualified plans, a plan must meet certain requirements (qualification rules) of the tax law. Generally, unless you write your own plan, the financial institution that provided your plan will take the continuing responsibility for meeting qualification rules that are later changed. The following is a brief overview of important qualification rules that generally haven't yet been discussed. It isn't intended to be all-inclusive. See Setting Up a Qualified Plan , later.

Your plan must make it impossible for its assets to be used for, or diverted to, purposes other than the exclusive benefit of employees and their beneficiaries. As a general rule, the assets can't be diverted to the employer.

To be a qualified plan, a defined benefit plan must benefit at least the lesser of the following.

50 employees.

The greater of:

40% of all employees, or

Two employees.

Under the plan, contributions or benefits to be provided must not discriminate in favor of highly compensated employees.

Your plan must not provide for contributions or benefits that are more than certain limits. The limits apply to the annual contributions and other additions to the account of a participant in a defined contribution plan and to the annual benefit payable to a participant in a defined benefit plan. These limits are discussed later in this chapter under Contributions.

Your plan must satisfy certain requirements regarding when benefits vest. A benefit is vested (you have a fixed right to it) when it becomes nonforfeitable. A benefit is nonforfeitable if it can't be lost upon the happening, or failure to happen, of any event. Special rules apply to forfeited benefit amounts. In defined contribution plans, forfeitures can be allocated to the accounts of remaining participants in a nondiscriminatory way, or they can be used to reduce your contributions.

Forfeitures under a defined benefit plan can't be used to increase the benefits any employee would otherwise receive under the plan. Forfeitures must be used instead to reduce employer contributions.

In general, an employee must be allowed to participate in your plan if they meet both the following requirements.

Has at least 1 year of service (2 years if the plan isn't a 401(k) plan and provides that after not more than 2 years of service the employee has a nonforfeitable right to all their accrued benefit).

A leased employee, defined in chapter 1, who performs services for you (recipient of the services) is treated as your employee for certain plan qualification rules. These rules include those in all the following areas.

Nondiscrimination in coverage, contributions, and benefits.

Minimum age and service requirements.

Limits on contributions and benefits.

Your plan must provide that, unless the participant chooses otherwise, the payment of benefits to the participant must begin within 60 days after the close of the latest of the following periods.

The plan year in which the participant reaches the earlier of age 65 or the normal retirement age specified in the plan.

The plan year in which the 10th anniversary of the year in which the participant began participating in the plan occurs.

The plan year in which the participant separates from service.

Your plan can provide for payment of retirement benefits before the normal retirement age. If your plan offers an early retirement benefit, a participant who separates from service before satisfying the early retirement age requirement is entitled to that benefit if the participant meets both the following requirements.

Satisfies the service requirement for the early retirement benefit.

Separates from service with a nonforfeitable right to an accrued benefit. The benefit, which may be actuarially reduced, is payable when the early retirement age requirement is met.

Special rules require minimum annual distributions from qualified plans, generally beginning after age 72 (if age 70½ was attained after December 31, 2019). See Required Distributions under Distributions , later.

Defined benefit and money purchase pension plans must provide automatic survivor benefits in both the following forms.

A qualified joint and survivor annuity for a vested participant who doesn't die before the annuity starting date.

A qualified pre-retirement survivor annuity for a vested participant who dies before the annuity starting date and who has a surviving spouse.

The automatic survivor benefit also applies to any participant under a profit-sharing plan unless all the following conditions are met.

The participant doesn't choose benefits in the form of a life annuity.

The plan pays the full vested account balance to the participant's surviving spouse (or other beneficiary if the surviving spouse consents or if there is no surviving spouse) if the participant dies.

The plan isn't a direct or indirect transferee of a plan that must provide automatic survivor benefits.

If automatic survivor benefits are required for a spouse under a plan, they must consent to a loan that uses as security the accrued benefits in the plan.

Each plan participant may be permitted to waive the joint and survivor annuity or the pre-retirement survivor annuity (or both), but only if the participant has the written consent of the spouse. The plan must also allow the participant to withdraw the waiver. The spouse's consent must be witnessed by a plan representative or notary public.

A plan may provide for the immediate distribution of the participant's benefit under the plan if the present value of the benefit isn't greater than $5,000.

However, the distribution can't be made after the annuity starting date unless the participant and the spouse or surviving spouse of a participant who died (if automatic survivor benefits are required for a spouse under the plan) consents in writing to the distribution. If the present value is greater than $5,000, the plan must have the written consent of the participant and the spouse or surviving spouse (if automatic survivor benefits are required for a spouse under the plan) for any immediate distribution of the benefit.

Benefits attributable to rollover contributions and earnings on them can be ignored in determining the present value of these benefits.

A plan must provide for the automatic rollover of any cash-out distribution of more than $1,000 to an individual retirement account or annuity, unless the participant chooses otherwise. A section 402(f) notice must be sent prior to an involuntary cash-out of an eligible rollover distribution. See Section 402(f) notice under Distributions , later, for more details.

Your plan must provide that, in the case of any merger or consolidation with, or transfer of assets or liabilities to, any other plan, each participant would (if the plan then terminated) receive a benefit equal to or more than the benefit they would have been entitled to just before the merger, etc. (if the plan had then terminated).

Your plan must provide that a participant's or beneficiary's benefits under the plan can't be taken away by any legal or equitable proceeding except as provided below or pursuant to certain judgments or settlements against the participant for violations of plan rules.

A loan from the plan (not from a third party) to a participant or beneficiary isn't treated as an assignment or alienation if the loan is secured by the participant's accrued nonforfeitable benefit and is exempt from the tax on prohibited transactions under section 4975(d)(1) or would be exempt if the participant were a disqualified person. A disqualified person is defined later in this chapter under Prohibited Transactions.

Compliance with a QDRO doesn't result in a prohibited assignment or alienation of benefits.

Payments to an alternate payee under a QDRO before the participant attains age 59½ aren't subject to the 10% additional tax that would otherwise apply under certain circumstances. Benefits distributed to an alternate payee under a QDRO can be rolled over tax free to an individual retirement account or to an individual retirement annuity.

Your plan must not permit a benefit reduction for a post-separation increase in the social security benefit level or wage base for any participant or beneficiary who is receiving benefits under your plan, or who is separated from service and has nonforfeitable rights to benefits. This rule also applies to plans supplementing the benefits provided by other federal or state laws.

If your plan provides for elective deferrals, it must limit those deferrals to the amount in effect for that particular year. See Limit on Elective Deferrals , later in this chapter.

A top-heavy plan is one that mainly favors partners, sole proprietors, and other key employees.

A plan is top-heavy for a plan year if, for the preceding plan year, the total value of accrued benefits or account balances of key employees is more than 60% of the total value of accrued benefits or account balances of all employees. Additional requirements apply to a top-heavy plan primarily to provide minimum benefits or contributions for non-key employees covered by the plan.

Most qualified plans, whether or not top-heavy, must contain provisions that meet the top-heavy requirements and will take effect in plan years in which the plans are top-heavy. These qualification requirements for top-heavy plans are explained in section 416 and its regulations.

The top-heavy plan requirements don't apply to SIMPLE 401(k) plans, discussed earlier in chapter 3, or to safe harbor 401(k) plans that consist solely of safe harbor contributions, discussed later in this chapter. QACAs (discussed later) also aren't subject to top-heavy requirements.

Setting up a Qualified Plan

There are two basic steps in setting up a qualified plan. First, you adopt a written plan. Then, you invest the plan assets.

You, the employer, are responsible for setting up and maintaining the plan.

To take a deduction for contributions for a tax year, your plan must be set up (adopted) by the last day of that year (December 31 for calendar-year employers).

Adopting a Written Plan

You must adopt a written plan. The plan can be an IRS pre-approved plan offered by a sponsoring organization. Or it can be an individually designed plan.

To qualify, the plan you set up must be in writing and must be communicated to your employees. The plan's provisions must be stated in the plan. It isn't sufficient for the plan to merely refer to a requirement of the Internal Revenue Code.

Most qualified plans follow a standard form of plan approved by the IRS. An IRS pre-approved plan is a plan, including a plan covering self-employed individuals, that is made available by a provider for adoption by employers. Under the prior IRS pre-approved plan program, a plan could be a master plan, a prototype plan, or a volume submitter plan. Under the restructured program, the three plan types were combined into one type called a pre-approved plan. IRS pre-approved plans include both standardized plans and nonstandardized plans. An IRS pre-approved plan may use a single funding medium, for example, a trust or custodial account document, for the joint use of all adopting employers or separate funding mediums established for each adopting employer. An IRS pre-approved plan may consist of an adoption agreement plan or a single document plan. For more information about IRS pre-approved plans, see Revenue Procedure 2017-41, 2017-29 I.R.B. 92, available at IRS.gov/irb/2017-29_IRB#RP-2017-41 .

The following organizations can generally provide IRS pre-approved plans.

Banks (including some savings and loan associations and federally insured credit unions).

Trade or professional organizations.

Insurance companies.

Mutual funds.

Third-party administrators.

If you prefer, you can set up an individually designed plan to meet specific needs. Although advance IRS approval is not required, you can apply for approval by paying a fee and requesting a determination letter. You may need professional help for this. See Revenue Procedure 2020-4, 2020-1 I.R.B. 148, available at IRS.gov/irb/2020-01_IRB , as annually updated, that may help you decide whether to apply for approval.

The fee mentioned earlier for requesting a determination letter doesn't apply to employers who have 100 or fewer employees who received at least $5,000 of compensation from the employer for the preceding year. At least one of them must be a non-highly compensated employee participating in the plan. The fee doesn't apply to requests made by the later of the following dates.

The end of the fifth plan year the plan is in effect.

The end of any remedial amendment period for the plan that begins within the first 5 plan years.

For more information about whether the user fee applies, see Revenue Procedure 2020-4, 2020-1 I.R.B. 148, available at IRS.gov/irb/2020-01_IRB , as may be annually updated; Notice 2017-1, 2017-2 I.R.B. 367, available at IRS.gov/irb/2017-02_IRB ; and Form 8717.

Investing Plan Assets

In setting up a qualified plan, you arrange how the plan's funds will be used to build its assets.

You can establish a trust or custodial account to invest the funds.

You, the trust, or the custodial account can buy an annuity contract from an insurance company. Life insurance can be included only if it is incidental to the retirement benefits.

You set up a trust by a legal instrument (written document). You may need professional help to do this.

You can set up a custodial account with a bank, savings and loan association, credit union, or other person who can act as the plan trustee.

You don't need a trust or custodial account, although you can have one, to invest the plan's funds in annuity contracts or face-amount certificates. If anyone other than a trustee holds them, however, the contracts or certificates must state they aren't transferable.

For information on other important plan requirements, see Qualification Rules , earlier in this chapter.

Minimum Funding Requirement

In general, if your plan is a money purchase pension plan or a defined benefit plan, you must actually pay enough into the plan to satisfy the minimum funding standard for each year. Determining the amount needed to satisfy the minimum funding standard for a defined benefit plan is complicated, and you should seek professional help in order to meet these contribution requirements. For information on this funding requirement, see section 430 and its regulations.

If your plan is a defined benefit plan subject to the minimum funding requirements, you must generally make quarterly installment payments of the required contributions. If you don't pay the full installments timely, you may have to pay interest on any underpayment for the period of the underpayment.

The due dates for the installments are 15 days after the end of each quarter. For a calendar-year plan, the installments are due April 15, July 15, October 15, and January 15 (of the following year).

Each quarterly installment must be 25% of the required annual payment.

Additional contributions required to satisfy the minimum funding requirement for a plan year will be considered timely if made by 8½ months after the end of that year.

A qualified plan is generally funded by your contributions. However, employees participating in the plan may be permitted to make contributions, and you may be permitted to make contributions on your own behalf. See Employee Contributions and Elective Deferrals , later.

You can make deductible contributions for a tax year up to the due date of your return (plus extensions) for that year.

You can make contributions on behalf of yourself only if you have net earnings (compensation) from self-employment in the trade or business for which the plan was set up. Your net earnings must be from your personal services, not from your investments. If you have a net loss from self-employment, you can't make contributions for yourself for the year, even if you can contribute for common-law employees based on their compensation.

Employer Contributions

There are certain limits on the contributions and other annual additions you can make each year for plan participants. There are also limits on the amount you can deduct. See Deduction Limits , later.

Limits on Contributions and Benefits

Your plan must provide that contributions or benefits can't exceed certain limits. The limits differ depending on whether your plan is a defined contribution plan or a defined benefit plan.

For 2022, the annual benefit for a participant under a defined benefit plan can't exceed the lesser of the following amounts.

100% of the participant's average compensation for their highest 3 consecutive calendar years.

$245,000 for 2022 ($265,000 for 2023).

For 2022, a defined contribution plan's annual contributions and other additions (excluding earnings) to the account of a participant can't exceed the lesser of the following amounts.

100% of the participant's compensation.

$61,000 for 2022 ($66,000 for 2023).

Catch-up contributions (discussed later under Limit on Elective Deferrals ) aren't subject to the above limit.

Participants may be permitted to make nondeductible contributions to a plan in addition to your contributions. Even though these employee contributions aren't deductible, the earnings on them are tax free until distributed in later years. Also, these contributions must satisfy the actual contribution percentage (ACP) test of section 401(m)(2), a nondiscrimination test that applies to employee contributions and matching contributions. See Regulations sections 1.401(k)-2 and 1.401(m)-2 for further guidance relating to the nondiscrimination rules under sections 401(k) and 401(m).

When Contributions Are Considered Made

You generally apply your plan contributions to the year in which you make them. But you can apply them to the previous year if all the following requirements are met.

You make them by the due date of your tax return for the previous year (plus extensions).

The plan was established by the end of the previous year.

The plan treats the contributions as though it had received them on the last day of the previous year.

You do either of the following.

You specify in writing to the plan administrator or trustee that the contributions apply to the previous year.

You deduct the contributions on your tax return for the previous year. A partnership shows contributions for partners on Form 1065.

Your promissory note made out to the plan isn't a payment that qualifies for the deduction. Also, issuing this note is a prohibited transaction subject to tax. See Prohibited Transactions , later.

Employer Deduction

You can usually deduct, subject to limits, contributions you make to a qualified plan, including those made for your own retirement. The contributions (and earnings and gains on them) are generally tax free until distributed by the plan.

Deduction Limits

The deduction limit for your contributions to a qualified plan depends on the kind of plan you have.

The deduction for contributions to a defined contribution plan (profit-sharing plan or money purchase pension plan) can't be more than 25% of the compensation paid (or accrued) during the year to your eligible employees participating in the plan. If you are self-employed, you must reduce this limit in figuring the deduction for contributions you make for your own account. See Deduction Limit for Self-Employed Individuals , later.

When figuring the deduction limit, the following rules apply.

Elective deferrals (discussed later) aren't subject to the limit.

Compensation includes elective deferrals.

The maximum compensation that can be taken into account for each employee in 2022 is $305,000 ($330,000 in 2023).

The deduction for contributions to a defined benefit plan is based on actuarial assumptions and computations. Consequently, an actuary must figure your deduction limit.

If you make contributions for yourself, you need to make a special computation to figure your maximum deduction for these contributions. Compensation is your net earnings from self-employment, defined in chapter 1. This definition takes into account both the following items.

The deduction for contributions on your behalf to the plan.

The deduction for your own contributions and your net earnings depend on each other. For this reason, you determine the deduction for your own contributions indirectly by reducing the contribution rate called for in your plan. To do this, use either the Rate Table for Self-Employed or the Rate Worksheet for Self-Employed in chapter 5. Then, figure your maximum deduction by using the Deduction Worksheet for Self-Employed in chapter 5.

Sole proprietors and partners deduct contributions for themselves on line 15 of Schedule 1 (Form 1040). (If you are a partner, contributions for yourself are shown on the Schedule K-1 (Form 1065) you get from the partnership.)

If you contribute more to a plan than you can deduct for the year, you can carry over and deduct the difference in later years, combined with your contributions for those years. Your combined deduction in a later year is limited to 25% of the participating employees' compensation for that year. For purposes of this limit, a SEP is treated as a profit-sharing (defined contribution) plan. However, this percentage limit must be reduced to figure your maximum deduction for contributions you make for yourself. See Deduction Limit for Self-Employed Individuals , earlier. The amount you carry over and deduct may be subject to the excise tax discussed next.

Table 4-1. Carryover of Excess Contributions Illustrated Profit-Sharing Plan illustrates the carryover of excess contributions to a profit-sharing plan.

Excise Tax for Nondeductible (Excess) Contributions

If you contribute more than your deduction limit to a retirement plan, you have made nondeductible contributions and you may be liable for an excise tax. In general, a 10% excise tax applies to nondeductible contributions made to qualified pension and profit-sharing plans and to SEPs.

The 10% excise tax doesn't apply to any contribution made to meet the minimum funding requirements in a money purchase pension plan or a defined benefit plan. Even if that contribution is more than your earned income from the trade or business for which the plan is set up, the difference isn't subject to this excise tax. See Minimum Funding Requirement , earlier.

You must report the tax on your nondeductible contributions on Form 5330. Form 5330 includes a computation of the tax. See the separate instructions for completing the form.

Elective Deferrals (401(k) Plans)

Your qualified plan can include a cash or deferred arrangement under which participants can choose to have you contribute part of their before-tax compensation to the plan rather than receive the compensation in cash. A plan with this type of arrangement is popularly known as a 401(k) plan. (As a self-employed individual participating in the plan, you can contribute part of your before-tax net earnings from the business.) This contribution is called an elective deferral because participants choose (elect) to defer receipt of the money.

In general, a qualified plan can include a cash or deferred arrangement only if the qualified plan is one of the following plans.

A profit-sharing plan.

A money purchase pension plan in existence on June 27, 1974, that included a salary reduction arrangement on that date.

A partnership can have a 401(k) plan.

The plan can't require, as a condition of participation, that an employee complete more than 1 year of service.

If your plan permits, you can make matching contributions for an employee who makes an elective deferral to your 401(k) plan. For example, the plan might provide that you will contribute 50 cents for each dollar your participating employees choose to defer under your 401(k) plan. Matching contributions are generally subject to the ACP test discussed earlier under Employee Contributions .

You can also make contributions (other than matching contributions) for your participating employees without giving them the choice to take cash instead. These are called nonelective contributions.

No more than $305,000 of the employee's compensation can be taken into account when figuring contributions other than elective deferrals in 2022. This limit is $330,000 for 2023.

If you had 100 or fewer employees who earned $5,000 or more in compensation during the preceding year, you may be able to set up a SIMPLE 401(k) plan. A SIMPLE 401(k) plan isn't subject to the nondiscrimination and top-heavy plan requirements discussed earlier under Qualification Rules. For details about SIMPLE 401(k) plans, see SIMPLE 401(k) Plan in chapter 3.

Certain rules apply to distributions from 401(k) plans. See Distributions From 401(k) Plans , later.

There is a limit on the amount an employee can defer each year under these plans. This limit applies without regard to community property laws. Your plan must provide that your employees can't defer more than the limit that applies for a particular year. The basic limit on elective deferrals is $20,500 for 2022 and increases to $22,500 for 2023. This limit applies to all salary reduction contributions and elective deferrals. If, in conjunction with other plans, the deferral limit is exceeded, the difference is included in the employee's gross income.

A 401(k) plan can permit participants who are age 50 or over at the end of the calendar year to also make catch-up contributions. The catch-up contribution limit is $6,500 for 2022 and increases to $7,500 for 2023. Elective deferrals aren't treated as catch-up contributions for 2022 until they exceed the $20,500 limit ($22,500 limit for 2023), the ADP test limit of section 401(k)(3), or the plan limit (if any). However, the catch-up contributions a participant can make for a year can't exceed the lesser of the following amounts.

Your contributions to your own 401(k) plan are generally deductible by you for the year they are contributed to the plan. Matching or nonelective contributions made to the plan are also deductible by you in the year of contribution. Your employees' elective deferrals other than designated Roth contributions are tax free until distributed from the plan. Elective deferrals are included in wages for social security, Medicare, and FUTA tax.

Employees have a nonforfeitable right at all times to their accrued benefit attributable to elective deferrals.

Don't include elective deferrals in the “Wages, tips, other compensation” box of Form W-2. You must, however, include them in the “Social security wages” and “Medicare wages and tips” boxes. You must also include them in box 12. Mark the “Retirement plan” checkbox in box 13. For more information, see the Form W-2 instructions.

Automatic Enrollment

Your 401(k) plan can have an automatic enrollment feature. Under this feature, you can automatically reduce an employee's pay by a fixed percentage and contribute that amount to the 401(k) plan on their behalf unless the employee affirmatively chooses not to have their pay reduced or chooses to have it reduced by a different percentage. These contributions are elective deferrals. An automatic enrollment feature will encourage employees' saving for retirement and will help your plan pass nondiscrimination testing (if applicable). For more information, see Pub. 4674.

Under an EACA, a participant is treated as having elected to have the employer make contributions in an amount equal to a uniform percentage of compensation. This automatic election will remain in place until the participant specifically elects not to have such deferral percentage made (or elects a different percentage). There is no required deferral percentage.

Under an EACA, you may allow participants to withdraw their automatic contributions to the plan if certain conditions are met.

The participant must elect the withdrawal no later than 90 days after the date of the first elective contributions under the EACA.

The participant must withdraw the entire amount of EACA default contributions, including any earnings thereon.

If the plan allows withdrawals under the EACA, the amount of the withdrawal other than the amount of any designated Roth contributions must be included in the employee's gross income for the tax year in which the distribution is made. The additional 10% tax on early distributions won't apply to the distribution.

Under an EACA, employees must be given written notice of the terms of the EACA within a reasonable period of time before each plan year. The notice must be written in a manner calculated to be understood by the average employee and be sufficiently accurate and comprehensive in order to apprise the employee of their rights and obligations under the EACA. The notice must include an explanation of the employee's right to elect not to have elective contributions made on their behalf, or to elect a different percentage, and the employee must be given a reasonable period of time after receipt of the notice before the first elective contribution is made. The notice must also explain how contributions will be invested in the absence of an investment election by the employee.

A QACA is a type of safe harbor plan. It contains an automatic enrollment feature, and mandatory employer contributions are required. If your plan includes a QACA, it won't be subject to the ADP test (discussed later) nor the top-heavy requirements (discussed earlier). Additionally, your plan won't be subject to the ACP test if certain additional requirements are met. Under a QACA, each employee who is eligible to participate in the plan will be treated as having elected to make elective deferral contributions equal to a certain default percentage of compensation. In order to not have default elective deferrals made, an employee must make an affirmative election specifying a deferral percentage (including zero, if desired). If an employee doesn't make an affirmative election, the default deferral percentage must meet the following conditions.

It must be applied uniformly.

It must not exceed 10%. (After December 31, 2019, the maximum default deferral percentage increases to 15%.)

It must be at least 3% in the first plan year it applies to an employee and through the end of the following year.

It must increase to at least 4% in the following plan year.

It must increase to at least 5% in the following plan year.

It must increase to at least 6% in subsequent plan years.

Under the terms of the QACA, you must make either matching or nonelective contributions according to the following terms.

Matching contributions. You must make matching contributions on behalf of each non-highly compensated employee in the following amounts.

An amount equal to 100% of elective deferrals, up to 1% of compensation.

An amount equal to 50% of elective deferrals, from 1% up to 6% of compensation.

Other formulas may be used as long as they are at least as favorable to non-highly compensated employees. The rate of matching contributions for highly compensated employees, including yourself, must not exceed the rates for non-highly compensated employees.

Nonelective contributions. You must make nonelective contributions on behalf of every non-highly compensated employee eligible to participate in the plan, regardless of whether they elected to participate, in an amount equal to at least 3% of their compensation.

All accrued benefits attributed to matching or nonelective contributions under the QACA must be 100% vested for all employees who complete 2 years of service. These contributions are subject to special withdrawal restrictions, discussed later.

Each employee eligible to participate in the QACA must receive written notice of their rights and obligations under the QACA within a reasonable period before each plan year. The notice must be written in a manner calculated to be understood by the average employee, and it must be accurate and comprehensive. The notice must explain their right to elect not to have elective contributions made on their behalf, or to have contributions made at a different percentage than the default percentage. Additionally, the notice must explain how contributions will be invested in the absence of any investment election by the employee. The employee must have a reasonable period of time after receiving the notice to make such contribution and investment elections prior to the first contributions under the QACA.

If you make nonelective contributions under the QACA and you either don't make any matching contributions or you make matching contributions that are intended to satisfy the ACP test, then this QACA notice requirement doesn’t apply. However, this exception doesn’t apply to the EACA notice requirement, earlier.

Treatment of Excess Deferrals

If the total of an employee's deferrals is more than the limit for 2022, the employee can have the difference (called an excess deferral) paid out of any of the plans that permit these distributions. The employee must notify the plan by April 15, 2023 (or an earlier date specified in the plan), of the amount to be paid from each plan. The plan must then pay the employee that amount, plus earnings on the amount through the end of 2022, by April 15, 2023.

If the employee takes out the excess deferral by April 15, 2023, it isn't reported again by including it in the employee's gross income for 2023. However, any income earned in 2022 on the excess deferral taken out is taxable in the tax year in which it is taken out. The distribution isn't subject to the additional 10% tax on early distributions.

If the employee takes out part of the excess deferral and the income on it, the distribution is treated as made proportionately from the excess deferral and the income.

Even if the employee takes out the excess deferral by April 15, the amount will be considered for purposes of nondiscrimination testing requirements of the plan, unless the distributed amount is for a non-highly compensated employee who participates in only one employer's 401(k) plan or plans.

If the employee doesn't take out the excess deferral by April 15, 2023, the excess, though taxable in 2022, isn't included in the employee's cost basis in figuring the taxable amount of any eventual distributions under the plan. In effect, an excess deferral left in the plan is taxed twice, once when contributed and again when distributed. Also, if the employee's excess deferral is allowed to stay in the plan and the employee participates in no other employer's plan, the plan can be disqualified.

Report corrective distributions of excess deferrals (including any earnings) on Form 1099-R. For specific information about reporting corrective distributions, see the Instructions for Forms 1099-R and 5498.

The law provides tests to detect discrimination in a plan. If tests, such as the ADP test (see section 401(k)(3)) and the ACP test (see section 401(m)(2)), show that contributions for highly compensated employees are more than the test limits for these contributions, the employer may have to pay a 10% excise tax. Report the tax on Form 5330. The ADP test doesn't apply to a safe harbor 401(k) plan (discussed next) nor to a QACA. Also, the ACP test doesn't apply to these plans if certain additional requirements are met.

The tax for the year is 10% of the excess contributions for the plan year ending in your tax year. Excess contributions are elective deferrals, employee contributions, or employer matching or nonelective contributions that are more than the amount permitted under the ADP test or the ACP test.

See Regulations sections 1.401(k)-2 and 1.401(m)-2 for further guidance relating to the nondiscrimination rules under sections 401(k) and 401(m).

If you meet the requirements for a safe harbor 401(k) plan, you don't have to satisfy the ADP test or the ACP test if certain additional requirements are met. For your plan to be a safe harbor plan, you must meet the following conditions.

Matching or nonelective contributions. You must make matching or nonelective contributions according to one of the following formulas.

Matching contributions. You must make matching contributions according to the following rules.

You must contribute an amount equal to 100% of each non-highly compensated employee's elective deferrals, up to 3% of compensation.

You must contribute an amount equal to 50% of each non-highly compensated employee's elective deferrals, from 3% up to 5% of compensation.

The rate of matching contributions for highly compensated employees, including yourself, must not exceed the rates for non-highly compensated employees.

Nonelective contributions. You must make nonelective contributions, without regard to whether the employee made elective deferrals, on behalf of all non-highly compensated employees eligible to participate in the plan, equal to at least 3% of the employee's compensation.

These mandatory matching and nonelective contributions must be immediately 100% vested and are subject to special withdrawal restrictions.

Notice requirement. You must give eligible employees written notice of their rights and obligations with regard to contributions under the plan within a reasonable period before the plan year.

If you make nonelective contributions and you either don't make any matching contributions or you make matching contributions that are intended to satisfy the ACP test, then this notice requirement doesn’t apply. However, this exception doesn’t apply to the EACA notice requirement, earlier.

The other requirements for a 401(k) plan, including withdrawal and vesting rules, must also be met for your plan to qualify as a safe harbor 401(k) plan.

Qualified Roth Contribution Program

Under this program, an eligible employee can designate all or a portion of their elective deferrals as after-tax Roth contributions. Elective deferrals designated as Roth contributions must be maintained in a separate Roth account. However, unlike other elective deferrals, designated Roth contributions aren't excluded from employees' gross income, but qualified distributions from a Roth account are excluded from employees' gross income.

Under a qualified Roth contribution program, the amount of elective deferrals that an employee may designate as a Roth contribution is limited to the maximum amount of elective deferrals excludable from gross income for the year (for 2022, $20,500 if under age 50 and $27,000 if age 50 or over; amounts increase in 2023 to $22,500 and $30,000, respectively) less the total amount of the employee's elective deferrals not designated as Roth contributions.

Designated Roth contributions are treated the same as pre-tax elective deferrals for most purposes, including:

The annual individual elective deferral limit (total of all designated Roth contributions and traditional, pre-tax elective deferrals) of $20,500 for 2022 ($22,500 in 2023), with an additional $6,500 if age 50 or over;

Determining the maximum employee and employer annual contributions of the lesser of 100% of compensation or $61,000 for 2022 ($66,000 for 2023);

Nondiscrimination testing;

Required distributions; and

Elective deferrals not taken into account for purposes of deduction limits.

Qualified Distributions

A qualified distribution is a distribution that is made after the employee's nonexclusion period and:

On or after the employee attains age 59½,

On account of the employee's being disabled, or

On or after the employee's death.

An employee's nonexclusion period for a plan is the 5-tax-year period beginning with the earlier of the following tax years.

The first tax year in which the employee made a contribution to their Roth account in the plan.

If a rollover contribution was made to the employee's designated Roth account from a designated Roth account previously established for the employee under another plan, then the first tax year the employee made a designated Roth contribution to the previously established account.

A rollover from another account can be made to a designated Roth account in the same plan. For additional information on these in-plan Roth rollovers, see Notice 2010-84, 2010-51 I.R.B. 872, available at IRS.gov/irb/2010-51_IRB/ar11.html ; and Notice 2013-74, 2013-52 I.R.B. 819, available at IRS.gov/pub/irs-irbs/irb13-52_IRB . A distribution from a designated Roth account can only be rolled over to another designated Roth account or a Roth IRA. Rollover amounts don't apply toward the annual deferral limit.

You must report a contribution to a Roth account on Form W-2 and a distribution from a Roth account on Form 1099-R. See the Form W-2 and Form 1099-R instructions for detailed information.

Amounts paid to plan participants from a qualified plan are called distributions. Distributions may be nonperiodic, such as lump-sum distributions, or periodic, such as annuity payments. Also, certain loans may be treated as distributions. See Loans Treated as Distributions in Pub. 575.

Required Distributions

A qualified plan must provide that each participant will either:

Receive their entire interest (benefits) in the plan by the required beginning date (defined later), or

Begin receiving regular periodic distributions by the required beginning date in annual amounts figured to distribute the participant's entire interest (benefits) over their life expectancy or over the joint life expectancies of the participant and the designated beneficiary (or over a shorter period).

These distribution rules apply individually to each qualified plan. You can't satisfy the requirement for one plan by taking a distribution from another. The plan must provide that these rules override any inconsistent distribution options previously offered.

If the account balance of a qualified plan participant is to be distributed (other than as an annuity), the plan administrator must figure the minimum amount required to be distributed each distribution calendar year. This minimum is figured by dividing the account balance by the applicable life expectancy. The plan administrator can use the life expectancy tables in Pub. 590-B for this purpose. For more information on figuring the minimum distribution, see Tax on Excess Accumulation in Pub. 575.

Generally, each participant must receive their entire benefits in the plan or begin to receive periodic distributions of benefits from the plan by the required beginning date.

A participant must begin to receive distributions from their qualified retirement plan by April 1 of the first year after the later of the following years.

The calendar year in which the participant reaches age 72 (if age 70½ was attained after December 31, 2019).

The calendar year in which he or she retires from employment with the employer maintaining the plan.

If the participant is a 5% owner of the employer maintaining the plan, the participant must begin receiving distributions by April 1 of the first year after the calendar year in which the participant reached age 72 (if age 70½ was attained after December 31, 2019). For more information, see Tax on Excess Accumulation in Pub. 575 about distributions prior to 2020.

The distribution required to be made by April 1 is treated as a distribution for the starting year. (The starting year is the year in which the participant meets (1) or (2) above, whichever applies.) After the starting year, the participant must receive the required distribution for each year by December 31 of that year. If no distribution is made in the starting year, required distributions for 2 years must be made in the next year (one by April 1 and one by December 31).

See Pub. 575 for the special rules covering distributions made after the death of a participant.

Distributions From 401(k) Plans

Generally, distributions can't be made until one of the following occurs.

The employee retires, dies, becomes disabled, or otherwise severs employment.

The plan ends and no other defined contribution plan is established or continued.

In the case of a 401(k) plan that is part of a profit-sharing plan, the employee reaches age 59½ or suffers financial hardship. For the rules on hardship distributions, including the limits on them, see Regulations section 1.401(k)-1(d).

The employee becomes eligible for a qualified reservist distribution (defined next).

A qualified reservist distribution is a distribution from an IRA or an elective deferral account made after September 11, 2001, to a military reservist or a member of the National Guard who has been called to active duty for at least 180 days or for an indefinite period. All or part of a qualified reservist distribution can be repaid to an IRA. The additional 10% tax on early distributions doesn't apply to a qualified reservist distribution.

Tax Treatment of Distributions

Distributions from a qualified plan minus a prorated part of any cost basis are subject to income tax in the year they are distributed. Because most recipients have no cost basis, a distribution is generally fully taxable. An exception is a distribution that is properly rolled over as discussed under Rollover next.

The tax treatment of distributions depends on whether they are made periodically over several years or life (periodic distributions) or are nonperiodic distributions. See Taxation of Periodic Payments and Taxation of Nonperiodic Payments in Pub. 575 for a detailed description of how distributions are taxed, including the 10-year tax option or capital gain treatment of a lump-sum distribution.

A recipient of a distribution from a designated Roth account will have a cost basis because designated Roth contributions are made on an after-tax basis. Also, a distribution from a designated Roth account is entirely tax free if certain conditions are met. See Qualified distributions under Qualified Roth Contribution Program , earlier.

The recipient of an eligible rollover distribution from a qualified plan can defer the tax on it by rolling it over into a traditional IRA or another eligible retirement plan. However, it may be subject to withholding, as discussed under Withholding requirement , later. A rollover can also be made to a Roth IRA, in which case any previously untaxed amounts are includible in gross income unless the rollover is from a designated Roth account.

This is a distribution of all or any part of an employee's balance in a qualified retirement plan that isn't any of the following.

An RMD. See Required Distributions , earlier.

Any of a series of substantially equal payments made at least once a year over any of the following periods.

The employee's life or life expectancy.

The joint lives or life expectancies of the employee and beneficiary.

A period of 10 years or longer.

A hardship distribution.

The portion of a distribution that represents the return of an employee's nondeductible contributions to the plan. See Employee Contributions , earlier, and Rollover of nontaxable amounts next.

Loans treated as distributions.

Dividends on employer securities.

The cost of any life insurance coverage provided under a qualified retirement plan.

Similar items designated by the IRS in published guidance. See, for example, the Instructions for Forms 1099-R and 5498.

You may be able to roll over the nontaxable part of a distribution to another qualified retirement plan or a section 403(b) plan, or to an IRA. If the rollover is to a qualified retirement plan or a section 403(b) plan that separately accounts for the taxable and nontaxable parts of the rollover, the transfer must be made through a direct (trustee-to-trustee) rollover. If the rollover is to an IRA, the transfer can be made by any rollover method.

A distribution from a designated Roth account can be rolled over to another designated Roth account or to a Roth IRA. If the rollover is to a Roth IRA, it can be rolled over by any rollover method, but if the rollover is to another designated Roth account, it must be rolled over directly (trustee-to-trustee).

For more information about rollovers, see Rollovers in Pubs. 575 and 590-A. For rules on rolling over distributions that contain nontaxable amounts, see Notice 2014-54, 2014-41 I.R.B. 670, available at IRS.gov/irb/2014-41_IRB/ar11.html . For guidance on rolling money into a qualified plan, see Revenue Ruling 2014-9, 2014-17 I.R.B. 975, available at IRS.gov/irb/2014-17_IRB/ar05.html .

If, during a year, a qualified plan pays to a participant one or more eligible rollover distributions (defined earlier) that are reasonably expected to total $200 or more, the payor must withhold 20% of the taxable portion of each distribution for federal income tax.

If, instead of having the distribution paid to them, the participant chooses to have the plan pay it directly to an IRA or another eligible retirement plan (a direct rollover ), no withholding is required.

If the distribution isn't an eligible rollover distribution, defined earlier, the 20% withholding requirement doesn't apply. Other withholding rules apply to distributions that aren't eligible rollover distributions, such as long-term periodic distributions and required distributions (periodic or nonperiodic). However, the participant can choose not to have tax withheld from these distributions. If the participant doesn't make this choice, the following withholding rules apply.

For periodic distributions, withholding is based on their treatment as wages.

For nonperiodic distributions, 10% of the taxable part is withheld.

If no income tax is withheld or not enough tax is withheld, the recipient of a distribution may have to make estimated tax payments. For more information, see Withholding Tax and Estimated Tax in Pub. 575.

If a distribution is an eligible rollover distribution, as defined earlier, you must provide a written notice to the recipient that explains the following rules regarding such distributions.

That the distribution may be directly transferred to an eligible retirement plan and information about which distributions are eligible for this direct transfer.

That tax will be withheld from the distribution if it isn't directly transferred to an eligible retirement plan.

That the distribution won't be subject to tax if transferred to an eligible retirement plan within 60 days after the date the recipient receives the distribution.

Certain other rules that may be applicable.

Notice 2014-74, 2014-50 I.R.B. 937, available at IRS.gov/irb/2014-50_IRB/ar09.html , contains two updated safe harbor section 402(f) notices that plan administrators may provide recipients of eligible rollover distributions.

The notice must generally be provided no less than 30 days and no more than 180 days before the date of a distribution.

The written notice must be provided individually to each distributee of an eligible rollover distribution. Posting of the notice isn't sufficient. However, the written requirement may be satisfied through the use of electronic media if certain additional conditions are met. See Regulations section 1.401(a)-21.

Failure to give a 402(f) notice will result in a tax of $100 for each failure, with a total not exceeding $50,000 per calendar year. The tax won't be imposed if it is shown that such failure is due to reasonable cause and not to willful neglect.

Tax on Early Distributions

If a distribution is made to an employee under the plan before they reache age 59½, the employee may have to pay a 10% additional tax on the distribution. This tax applies to the amount received that the employee must include in income.

The 10% tax won't apply if distributions before age 59½ are made in any of the following circumstances.

Made to a beneficiary (or to the estate of the employee) on or after the death of the employee.

Made due to the employee having a qualifying disability.

Made as part of a series of substantially equal periodic payments beginning after separation from service and made at least annually for the life or life expectancy of the employee or the joint lives or life expectancies of the employee and their designated beneficiary. (The payments under this exception, except in the case of death or disability, must continue for at least 5 years or until the employee reaches age 59½, whichever is the longer period.)

Made to an employee after separation from service if the separation occurred during or after the calendar year in which the employee reached age 55.

Made to an alternate payee under a QDRO.

Made to an employee for medical care up to the amount allowable as a medical expense deduction (determined without regard to whether the employee itemizes deductions).

Timely made to reduce excess contributions under a 401(k) plan.

Timely made to reduce excess employee or matching employer contributions (excess aggregate contributions).

Timely made to reduce excess elective deferrals.

Made because of an IRS levy on the plan.

Made as a qualified reservist distribution.

Made as a permissible withdrawal from an EACA.

Made as a qualified birth or adoption distribution.

Made as a qualified disaster distribution.

To report the tax on early distributions, file Form 5329. See the form instructions for additional information about this tax.

Tax on Excess Benefits

If you are or have been a 5% owner of the business maintaining the plan, amounts you receive at any age that are more than the benefits provided for you under the plan formula are subject to an additional tax. This tax also applies to amounts received by your successor. The tax is 10% of the excess benefit includible in income.

To determine whether or not you are a 5% owner, see section 416.

Include on Schedule 2 (Form 1040), line 8, any tax you owe for an excess benefit. Check box 8c and, on the line next to it, enter “Sec. 72(m)(5)” and enter in the amount of the tax.

The amount subject to the additional tax isn't eligible for the optional methods of figuring income tax on a lump-sum distribution. The optional methods are discussed under Lump-Sum Distributions in Pub. 575.

A 20% or 50% excise tax is generally imposed on the cash and fair market value of other property an employer receives directly or indirectly from a qualified plan. If you owe this tax, report it on Schedule I of Form 5330. See the form instructions for more information.

An employer or the plan will have to pay an excise tax if both of the following occur.

A defined benefit plan or money purchase pension plan is amended to provide for a significant reduction in the rate of future benefit accrual.

The plan administrator fails to notify the affected individuals and the employee organizations representing them of the reduction in writing.

A plan amendment that eliminates or reduces any early retirement benefit or retirement-type subsidy reduces the rate of future benefit accrual.

The notice must be written in a manner calculated to be understood by the average plan participant and must provide enough information to allow each individual to understand the effect of the plan amendment. It must be provided within a reasonable time before the amendment takes effect.

The tax is $100 per participant or alternate payee for each day the notice is late. The total tax can't be more than $500,000 during the tax year. It is imposed on the employer or, in the case of a multiemployer plan, on the plan.

Prohibited Transactions

Prohibited transactions are transactions between the plan and a disqualified person that are prohibited by law. (However, see Exemption next.) If you are a disqualified person who takes part in a prohibited transaction, you must pay a tax (discussed later).

Prohibited transactions generally include the following transactions.

A transfer of plan income or assets to, or use of them by or for the benefit of, a disqualified person.

Any act of a fiduciary by which she or he deals with plan income or assets in the fiduciary own interest.

The receipt of consideration by a fiduciary for their own account from any party dealing with the plan in a transaction that involves plan income or assets.

Any of the following acts between the plan and a disqualified person.

Selling, exchanging, or leasing property.

Lending money or extending credit.

Furnishing goods, services, or facilities.

Certain transactions are exempt from being treated as prohibited transactions. For example, a prohibited transaction doesn't take place if you are a disqualified person and receive any benefit to which you are entitled as a plan participant or beneficiary. However, the benefit must be figured and paid under the same terms as for all other participants and beneficiaries. For other transactions that are exempt, see section 4975 and the related regulations.

You are a disqualified person if you are any of the following.

A fiduciary of the plan.

A person providing services to the plan.

An employer, any of whose employees are covered by the plan.

An employee organization, any of whose members are covered by the plan.

Any direct or indirect owner of 50% or more of any of the following.

The combined voting power of all classes of stock entitled to vote, or the total value of shares of all classes of stock of a corporation that is an employer or employee organization described in (3) or (4).

The capital interest or profits interest of a partnership that is an employer or employee organization described in (3) or (4).

The beneficial interest of a trust or unincorporated enterprise that is an employer or an employee organization described in (3) or (4).

A member of the family of any individual described in (1), (2), (3), or (5). (A member of a family is the spouse, ancestor, or lineal descendant, or any spouse of a lineal descendant.)

A corporation, partnership, trust, or estate of which (or in which) any direct or indirect owner described in (1) through (5) holds 50% or more of any of the following.

The combined voting power of all classes of stock entitled to vote or the total value of shares of all classes of stock of a corporation.

The capital interest or profits interest of a partnership.

The beneficial interest of a trust or estate.

An officer, a director (or an individual having powers or responsibilities similar to those of officers or directors), a 10% or more shareholder, or a highly compensated employee (earning 10%-or-more of the yearly wages of an employer) of a person described in (3), (4), (5), or (7).

A 10%-or-more (in capital or profits) partner or joint venturer of a person described in (3), (4), (5), or (7).

Any disqualified person, as described in (1) through (9) above, who is a disqualified person with respect to any plan to which a section 501(c)(22) trust is permitted to make payments under section 4223 of ERISA.

Tax on Prohibited Transactions

The initial tax on a prohibited transaction is 15% of the amount involved for each year (or part of a year) in the tax period. If the transaction isn't corrected within the tax period, an additional tax of 100% of the amount involved is imposed. For information on correcting the transaction, see Correcting a prohibited transaction , later.

Both taxes are payable by any disqualified person who participated in the transaction (other than a fiduciary acting only as such). If more than one person takes part in the transaction, each person can be jointly and severally liable for the entire tax.

The amount involved in a prohibited transaction is the greater of the following amounts.

The money and fair market value of any property given.

The money and fair market value of any property received.

If services are performed, the amount involved is any excess compensation given or received.

The tax period starts on the transaction date and ends on the earliest of the following days.

The day the IRS mails a notice of deficiency for the tax.

The day the IRS assesses the tax.

The day the correction of the transaction is completed.

Pay the 15% tax with Form 5330.

If you are a disqualified person who participated in a prohibited transaction, you can avoid the 100% tax by correcting the transaction as soon as possible. Correcting the transaction means undoing it as much as you can without putting the plan in a worse financial position than if you had acted under the highest fiduciary standards.

If the prohibited transaction isn't corrected during the tax period, you usually have an additional 90 days after the day the IRS mails a notice of deficiency for the 100% tax to correct the transaction. This correction period (the tax period plus the 90 days) can be extended if either of the following occurs.

The IRS grants reasonable time needed to correct the transaction.

You petition the Tax Court.

You may have to file an annual return/report by the last day of the seventh month after the plan year ends. See the following list of forms to choose the right form for your plan.

Form 5500-SF is a simplified annual reporting form. You can use Form 5500-SF if the plan meets all the following conditions.

The plan is a small plan (generally, fewer than 100 participants at the beginning of the plan year).

The plan meets the conditions for being exempt from the requirements that the plan's books and records be audited by an independent qualified public accountant.

The plan has 100% of its assets invested in certain secure investments with a readily determinable fair value.

The plan holds no employer securities.

The plan isn't a multiemployer plan.

If your plan is required to file an annual return/report but isn't eligible to file Form 5500-SF, the plan must file Form 5500 or Form 5500-EZ, as appropriate. For more details, see the Instructions for Form 5500-SF.

You may be able to use Form 5500-EZ if the plan is a one-participant plan, as defined below.

Your plan is a one-participant plan if either of the following is true.

The plan covers only you (or you and your spouse) and you (or you and your spouse) own the entire business (whether incorporated or unincorporated).

The plan covers only one or more partners (or partner(s) and spouse(s)) in a business partnership.

If your one-participant plan (or plans) had total assets of $250,000 or less at the end of the plan year, then you don't have to file Form 5500-EZ for that plan year. All plans should file a Form 5500-EZ for the final plan year to show that all plan assets have been distributed.

You are a sole proprietor and your plan meets all the conditions for filing Form 5500-EZ. The total plan assets are more than $250,000. You must file Form 5500-EZ or Form 5500-SF.

If you don't meet the requirements for filing Form 5500-EZ or Form 5500-SF and a return/report is required, you must file Form 5500.

All Forms 5500 and 5500-SF are required to be filed electronically with the Department of Labor through EFAST2. One-participant plans have the option of filing Form 5500-SF electronically rather than filing a Form 5500-EZ on paper with the IRS. For more information, see the instructions for Forms 5500 and 5500-SF, available at EFAST.dol.gov .

If you terminate your plan and are the plan sponsor or plan administrator, you can file Form 5310. Your application must be accompanied by the appropriate user fee and Form 8717.

Form 8955-SSA is used to report participants who are no longer covered by the plan but have a deferred vested benefit under the plan.

Form 8955-SSA is filed with the IRS and can be filed electronically through the FIRE (Filing Information Returns Electronically) system.

For more information about reporting requirements, see the forms and their instructions.

5. Table and Worksheets for the Self-Employed

As discussed in chapters 2 and 4, if you are self-employed, you must use the rate table or rate worksheet and deduction worksheet to figure your deduction for contributions you made for yourself to a SEP-IRA or qualified plan.

First, use either the rate table or rate worksheet to find your reduced contribution rate. Then, complete the deduction worksheet to figure your deduction for contributions.

If your plan's contribution rate is a whole percentage (for example, 12% rather than 12½%), you can use the Rate Table for Self-Employed on the next page to find your reduced contribution rate. Otherwise, use the Rate Worksheet for Self-Employed provided below.

First, find your plan contribution rate (the contribution rate stated in your plan) in Column A of the table. Then, read across to the rate under Column B. Enter the rate from Column B in step 4 of the Deduction Worksheet for Self-Employed on this page.

You are a sole proprietor with no employees. If your plan's contribution rate is 10% of a participant's compensation, your rate is 0.090909. Enter this rate in step 4 of the Deduction Worksheet for Self-Employed on this page.

Deduction Worksheet for Self-Employed

If your plan's contribution rate isn't a whole percentage (for example, 10½%), you can't use the Rate Table for Self-Employed. Use the following worksheet instead.

Rate Worksheet for Self-Employed

Now that you have your self-employed rate from either the rate table or rate worksheet, you can figure your maximum deduction for contributions for yourself by completing the Deduction Worksheet for Self-Employed.

If you reside in a community property state and you are married and filing a separate return, disregard community property laws for step 1 of the Deduction Worksheet for Self-Employed. Enter on step 1 the total net profit you actually earned.

Rate Table for Self-Employed

You are a sole proprietor with no employees. The terms of your plan provide that you contribute 8½% (0.085) of your compensation to your plan. Your net profit from Schedule C (Form 1040), line 31, is $200,000. You have no elective deferrals or catch-up contributions. Your self-employment tax deduction on line 15 of Schedule 1 (Form 1040) is $11,792. See the filled-in portions of both Schedule SE (Form 1040), and Form 1040, later.

You figure your self-employed rate and maximum deduction for employer contributions you made for yourself as follows.

See the filled-in Deduction Worksheet for Self-Employed on this page.

Portion of Form 1040 and Portion of Schedule SE

Portions of Schedule SE (Form 1040) and Schedule 1 (Form 1040)

Summary: These are portions of Schedule S.E. (Form 1040) and Form 1040 (2004) as pertains to the description in the text. The completed line items are:

Please click here for the text description of the image.

6. How To Get Tax Help

If you have questions about a tax issue, need help preparing your tax return, or want to download free publications, forms, or instructions, go to IRS.gov to find resources that can help you right away.

After receiving all your wage and earnings statements (Forms W-2, W-2G, 1099-R, 1099-MISC, 1099-NEC, etc.); unemployment compensation statements (by mail or in a digital format) or other government payment statements (Form 1099-G); and interest, dividend, and retirement statements from banks and investment firms (Forms 1099), you have several options to choose from to prepare and file your tax return. You can prepare the tax return yourself, see if you qualify for free tax preparation, or hire a tax professional to prepare your return.

Go to IRS.gov to see your options for preparing and filing your return online or in your local community, if you qualify, which include the following.

Free File. This program lets you prepare and file your federal individual income tax return for free using brand-name tax-preparation-and-filing software or Free File fillable forms. However, state tax preparation may not be available through Free File. Go to IRS.gov/FreeFile to see if you qualify for free online federal tax preparation, e-filing, and direct deposit or payment options.

VITA. The Volunteer Income Tax Assistance (VITA) program offers free tax help to people with low-to-moderate incomes, persons with disabilities, and limited-English-speaking taxpayers who need help preparing their own tax returns. Go to IRS.gov/VITA , download the free IRS2Go app, or call 800-906-9887 for information on free tax return preparation.

TCE. The Tax Counseling for the Elderly (TCE) program offers free tax help for all taxpayers, particularly those who are 60 years of age and older. TCE volunteers specialize in answering questions about pensions and retirement-related issues unique to seniors. Go to IRS.gov/TCE , download the free IRS2Go app, or call 888-227-7669 for information on free tax return preparation.

MilTax. Members of the U.S. Armed Forces and qualified veterans may use MilTax, a free tax service offered by the Department of Defense through Military OneSource. For more information, go to MilitaryOneSource ( MilitaryOneSource.mil/Tax ).

Also, the IRS offers Free Fillable Forms, which can be completed online and then filed electronically regardless of income.

Go to IRS.gov/Tools for the following.

The Earned Income Tax Credit Assistant ( IRS.gov/EITCAssistant ) determines if you’re eligible for the earned income credit (EIC).

The Online EIN Application ( IRS.gov/EIN ) helps you get an employer identification number (EIN) at no cost.

The Tax Withholding Estimator ( IRS.gov/W4app ) makes it easier for you to estimate the federal income tax you want your employer to withhold from your paycheck. This is tax withholding. See how your withholding affects your refund, take-home pay, or tax due.

The First-Time Homebuyer Credit Account Look-up ( IRS.gov/HomeBuyer ) tool provides information on your repayments and account balance.

The Sales Tax Deduction Calculator ( IRS.gov/SalesTax ) figures the amount you can claim if you itemize deductions on Schedule A (Form 1040).

IRS.gov/Help : A variety of tools to help you get answers to some of the most common tax questions.

IRS.gov/ITA : The Interactive Tax Assistant, a tool that will ask you questions on a number of tax law topics and provide answers.

IRS.gov/Forms : Find forms, instructions, and publications. You will find details on 2022 tax changes and hundreds of interactive links to help you find answers to your questions.

You may also be able to access tax law information in your electronic filing software.

There are various types of tax return preparers, including tax preparers, enrolled agents, certified public accountants (CPAs), attorneys, and many others who don’t have professional credentials. If you choose to have someone prepare your tax return, choose that preparer wisely. A paid tax preparer is:

Primarily responsible for the overall substantive accuracy of your return,

Required to sign the return, and

Required to include their preparer tax identification number (PTIN).

Although the tax preparer always signs the return, you're ultimately responsible for providing all the information required for the preparer to accurately prepare your return. Anyone paid to prepare tax returns for others should have a thorough understanding of tax matters. For more information on how to choose a tax preparer, go to Tips for Choosing a Tax Preparer on IRS.gov.

Go to IRS.gov/Coronavirus for links to information on the impact of the coronavirus, as well as tax relief available for individuals and families, small and large businesses, and tax-exempt organizations.

The Social Security Administration (SSA) offers online service at SSA.gov/employer for fast, free, and secure online W-2 filing options to CPAs, accountants, enrolled agents, and individuals who process Form W-2, Wage and Tax Statement, and Form W-2c, Corrected Wage and Tax Statement.

Go to IRS.gov/SocialMedia to see the various social media tools the IRS uses to share the latest information on tax changes, scam alerts, initiatives, products, and services. At the IRS, privacy and security are our highest priority. We use these tools to share public information with you. Don’t post your social security number (SSN) or other confidential information on social media sites. Always protect your identity when using any social networking site.

The following IRS YouTube channels provide short, informative videos on various tax-related topics in English, Spanish, and ASL.

Youtube.com/irsvideos .

Youtube.com/irsvideosmultilingua .

Youtube.com/irsvideosASL .

The IRS Video portal ( IRSVideos.gov ) contains video and audio presentations for individuals, small businesses, and tax professionals.

You can find information on IRS.gov/MyLanguage if English isn’t your native language.

The IRS is committed to serving our multilingual customers by offering OPI services. The OPI service is a federally funded program and is available at Taxpayer Assistance Centers (TACs), other IRS offices, and every VITA/TCE return site. OPI Service is accessible in more than 350 languages.

Taxpayers who need information about accessibility services can call 833-690-0598. The Accessibility Helpline can answer questions related to current and future accessibility products and services available in alternative media formats (for example, braille, large print, audio, etc.). The Accessibility Helpline does not have access to your IRS account. For help with tax law, refunds, or account-related issues, go to IRS.gov/LetUsHelp .

Form 9000, Alternative Media Preference, or Form 9000(SP) allows you to elect to receive certain types of written correspondence in the following formats.

Standard Print.

Large Print.

Audio (MP3).

Plain Text File (TXT).

Braille Ready File (BRF).

Go to Disaster Assistance and Emergency Relief for Individuals and Businesses to review the available disaster tax relief.

Go to IRS.gov/Forms to view, download, or print all of the forms, instructions, and publications you may need. Or you can go to IRS.gov/OrderForms to place an order.

You can also download and view popular tax publications and instructions (including the Instructions for Form 1040) on mobile devices as eBooks at IRS.gov/eBooks .

IRS eBooks have been tested using Apple's iBooks for iPad. Our eBooks haven’t been tested on other dedicated eBook readers, and eBook functionality may not operate as intended.

Go to IRS.gov/Account to securely access information about your federal tax account.

View the amount you owe and a breakdown by tax year.

See payment plan details or apply for a new payment plan.

Make a payment or view 5 years of payment history and any pending or scheduled payments.

Access your tax records, including key data from your most recent tax return, your EIP amounts, and transcripts.

View digital copies of select notices from the IRS.

Approve or reject authorization requests from tax professionals.

View your address on file or manage your communication preferences.

This tool lets your tax professional submit an authorization request to access your individual taxpayer IRS online account For more information, go to IRS.gov/TaxProAccount .

The fastest way to receive a tax refund is to file electronically and choose direct deposit, which securely and electronically transfers your refund directly into your financial account. Direct deposit also avoids the possibility that your check could be lost, stolen, or returned undeliverable to the IRS. Eight in 10 taxpayers use direct deposit to receive their refunds. If you don’t have a bank account, go to IRS.gov/DirectDeposit for more information on where to find a bank or credit union that can open an account online.

The quickest way to get a copy of your tax transcript is to go to IRS.gov/Transcripts . Click on either “Get Transcript Online” or “Get Transcript by Mail” to order a free copy of your transcript. If you prefer, you can order your transcript by calling 800-908-9946.

Tax-related identity theft happens when someone steals your personal information to commit tax fraud. Your taxes can be affected if your SSN is used to file a fraudulent return or to claim a refund or credit.

The IRS doesn’t initiate contact with taxpayers by email, text messages (including shortened links), telephone calls, or social media channels to request or verify personal or financial information. This includes requests for personal identification numbers (PINs), passwords, or similar information for credit cards, banks, or other financial accounts.

Go to IRS.gov/IdentityTheft , the IRS Identity Theft Central webpage, for information on identity theft and data security protection for taxpayers, tax professionals, and businesses. If your SSN has been lost or stolen or you suspect you’re a victim of tax-related identity theft, you can learn what steps you should take.

Get an Identity Protection PIN (IP PIN). IP PINs are six-digit numbers assigned to eligible taxpayers to help prevent the misuse of their SSNs on fraudulent federal income tax returns. When you have an IP PIN, it prevents someone else from filing a tax return with your SSN. To learn more, go to IRS.gov/IPPIN .

Go to IRS.gov/Refunds .

Download the official IRS2Go app to your mobile device to check your refund status.

Call the automated refund hotline at 800-829-1954.

The IRS can’t issue refunds before mid-February 2022 for returns that claimed the EIC or the additional child tax credit (ACTC). This applies to the entire refund, not just the portion associated with these credits.

Go to IRS.gov/Payments for information on how to make a payment using any of the following options.

IRS Direct Pay : Pay your individual tax bill or estimated tax payment directly from your checking or savings account at no cost to you.

Debit or Credit Card : Choose an approved payment processor to pay online, by phone, or by mobile device.

Electronic Funds Withdrawal : Offered only when filing your federal taxes using tax return preparation software or through a tax professional.

Electronic Federal Tax Payment System : Best option for businesses. Enrollment is required.

Check or Money Order : Mail your payment to the address listed on the notice or instructions.

Cash : You may be able to pay your taxes with cash at a participating retail store.

Same-Day Wire : You may be able to do same-day wire from your financial institution. Contact your financial institution for availability, cost, and time frames.

The IRS uses the latest encryption technology to ensure that the electronic payments you make online, by phone, or from a mobile device using the IRS2Go app are safe and secure. Paying electronically is quick, easy, and faster than mailing in a check or money order.

Go to IRS.gov/Payments for more information about your options.

Apply for an online payment agreement ( IRS.gov/OPA ) to meet your tax obligation in monthly installments if you can’t pay your taxes in full today. Once you complete the online process, you will receive immediate notification of whether your agreement has been approved.

Use the Offer in Compromise Pre-Qualifier to see if you can settle your tax debt for less than the full amount you owe. For more information on the Offer in Compromise program, go to IRS.gov/OIC .

Go to IRS.gov/Form1040X for information and updates.

Go to IRS.gov/WMAR to track the status of Form 1040-X amended returns.

It can take up to 3 weeks from the date you filed your amended return for it to show up in our system, and processing it can take up to 16 weeks.

Go to IRS.gov/Notices to find additional information about responding to an IRS notice or letter.

You can use Schedule LEP (Form 1040), Request for Change in Language Preference, to state a preference to receive notices, letters, or other written communications from the IRS in an alternative language. You may not immediately receive written communications in the requested language. The IRS’s commitment to LEP taxpayers is part of a multi-year timeline that is scheduled to begin providing translations in 2023. You will continue to receive communications, including notices and letters in English until they are translated to your preferred language.

Keep in mind, many questions can be answered on IRS.gov without visiting an IRS TAC. Go to IRS.gov/LetUsHelp for the topics people ask about most. If you still need help, IRS TACs provide tax help when a tax issue can’t be handled online or by phone. All TACs now provide service by appointment, so you’ll know in advance that you can get the service you need without long wait times. Before you visit, go to IRS.gov/TACLocator to find the nearest TAC and to check hours, available services, and appointment options. Or, on the IRS2Go app, under the Stay Connected tab, choose the Contact Us option and click on “Local Offices.”

The Taxpayer Advocate Service (TAS) Is Here To Help You

TAS is an independent organization within the IRS that helps taxpayers and protects taxpayer rights. Their job is to ensure that every taxpayer is treated fairly and that you know and understand your rights under the Taxpayer Bill of Rights .

The Taxpayer Bill of Rights describes 10 basic rights that all taxpayers have when dealing with the IRS. Go to TaxpayerAdvocate.IRS.gov to help you understand what these rights mean to you and how they apply. These are your rights. Know them. Use them.

TAS can help you resolve problems that you can’t resolve with the IRS. And their service is free. If you qualify for their assistance, you will be assigned to one advocate who will work with you throughout the process and will do everything possible to resolve your issue. TAS can help you if:

Your problem is causing financial difficulty for you, your family, or your business;

You face (or your business is facing) an immediate threat of adverse action; or

You’ve tried repeatedly to contact the IRS but no one has responded, or the IRS hasn’t responded by the date promised.

TAS has offices in every state, the District of Columbia, and Puerto Rico . Your local advocate’s number is in your local directory and at TaxpayerAdvocate.IRS.gov . You can also call them at 877-777-4778.

TAS works to resolve large-scale problems that affect many taxpayers. If you know of one of these broad issues, please report it to them at IRS.gov/SAMS .

TAS can provide a variety of information for tax professionals, including tax law updates and guidance, TAS programs, and ways to let TAS know about systemic problems you’ve seen in your practice.

LITCs are independent from the IRS. LITCs represent individuals whose income is below a certain level and need to resolve tax problems with the IRS, such as audits, appeals, and tax collection disputes. In addition, LITCs can provide information about taxpayer rights and responsibilities in different languages for individuals who speak English as a second language. Services are offered for free or a small fee for eligible taxpayers. To find an LITC near you, go to TaxpayerAdvocate.IRS.gov/about-us/Low-Income-Taxpayer-Clinics-LITC or see IRS Pub. 4134, Low Income Taxpayer Clinic List .

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Retirement deductions for small business owners

retirement funds for small business owners

Updated February 12, 2019

When you own your own business, it's up to you to establish and fund your own pension plan to supplement the Social Security benefits you'll receive when you retire. The tax law helps you do this by providing tax deductions and other income tax benefits for your retirement account contributions and earnings.

Choosing what type of account to establish is just as important as deciding what to invest in once you open your account‚ if not more so. Once you set up your retirement account, you can always change your investments within the account with little or no difficulty. But changing the type of retirement account you have may prove difficult and costly. So it's best to spend some time up front learning about your choices and deciding which plan will best meet your needs.

Why you need a retirement plan (Or plans)

In all likelihood, you will receive Social Security benefits when you retire. However, Social Security will probably cover only half of your needs‚ possibly less, depending upon your retirement lifestyle. You'll need to make up this shortfall with your own retirement investments.

When it comes to saving for retirement, small business owners are better off than employees of most companies. This is because the government allows small businesses to set up retirement accounts specifically designed for small business owners. These accounts provide enormous tax benefits that maximize the money you can save during your working years for your retirement years. The allowable amount you can contribute each year to your retirement account depends upon the type of account you establish and how much money you earn. If your business doesn't earn money, you won't be able to make any contributions‚ you need income to fund retirement accounts.

Tax deduction

Retirement accounts that comply with IRS requirements are called "tax-qualified."

You can deduct the amount you contribute to a tax-qualified retirement account from your income taxes (except for Roth IRAs and Roth 401(k)s). If you are a sole proprietor, a partner in a partnership or LLC member, you can deduct from your personal income contributions you make to a retirement account. If you have incorporated your business, the corporation can deduct as a business expense contributions that it makes on your behalf. Either way, you or your business get substantial income tax savings with these contributions.

Example: Art, a sole proprietor, contributes $10,000 this year to a qualified retirement account. He can deduct the entire amount from his personal income taxes. Because Art is in the 28% tax bracket, he saves $2,800 in income taxes for the year (28% √ó $10,000), and he has also saved $10,000 toward his retirement.

Tax deferral

In addition to the tax deduction you receive for putting money into a retirement account, there is another tremendous tax benefit to retirement accounts: tax deferral. When you earn money on an investment, you usually must pay taxes on those earnings in the same year that you earn the money. For example, you must pay taxes on the interest you earn on a savings account or certificate of deposit in the year when the interest accrues. And when you sell an investment at a profit, you must pay income tax in that year on the gain you receive. For example, you must pay tax on the profit you earn from selling stock in the year that you sell the stock.

A different rule applies, however, for earnings you receive from a tax-qualified retirement account. You do not pay taxes on investment earnings from retirement accounts until you withdraw the funds. Because most people withdraw these funds at retirement, they are often in a lower income tax bracket when they pay tax on these earnings. This can result in substantial tax savings for people who would have had to pay higher taxes on these earnings if they paid as the earnings accumulated.

Bill and Brian both invest in the same mutual fund. Bill has a taxable individual account, while Brian invests through a tax-deferred retirement account. They each invest $5,000 per year. They earn 8 percent on their investments each year and pay income tax at the 28 percent rate. At the end of 30 years, Brian has $566,416. Bill only has $272,869. Reason: Bill had to pay income taxes on the interest his investments earned each year, while Brian's interest accrued tax-free because he invested through a retirement account. Brian must pay tax on his earnings only when he withdraws the money (but retiree will have to pay a penalty tax if withdrawals occur before age 59¬Ω, subject to certain exceptions).

Types of retirement accounts

If, like the vast majority of small business owners, you're a sole proprietor with no employees, you have an array choice of tax-qualified retirement accounts to choose from.

Individual Retirement Accounts: IRAs

The simplest type of tax-deferred retirement account is the individual retirement account or IRA. An individual, not a business establishes an IRA retirement account. An IRA is a trust or custodial account set up for the benefit of an individual or his or her beneficiaries.

The trustee or custodian administers the account. The trustee can be a bank, mutual fund, brokerage firm or other financial institution (such as an insurance company). Most financial institutions offer an array of IRA accounts that provide for different types of investments.

You can establish as many IRA accounts as you want, but there is a maximum combined amount of money you can contribute to all of your IRA accounts each year. This amount goes up every year. Maximum contributions are $6,000 for individuals under age 50. An additional 1,000 catch up contribution is allowed for those age 50 or older.

There are two different types of IRAs that you can choose from: traditional IRAs, and Roth IRAs.  Contributions to traditional IRAs are tax deductible (subject to income limits if you have another retirement plan. However, withdrawals made after retirement qualifies as taxable income. In contrast, contributions to Roth IRAs are not deductible, but you pay no income tax on withdrawals you make after age 59¬Ω.

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A SEP-IRA is a simplified employee pension. It's very similar to an IRA, except that you can contribute more money under this plan. Instead of being limited to a $6,000 to $7,000 annual contribution, you can invest up to 25 percent of your net profit from self- employment every year, up to a maximum of $56,000 a year. You don't have to make contributions every year, and your contributions can vary from year to year. As with other IRAs, you can invest your money in almost anything (stocks, bonds, notes, mutual funds).

You can deduct your contributions to SEP-IRAs from your income taxes, and the interest on your SEP-IRA investments accrues tax-free until you withdraw the money. Withdrawals from SEP-IRAs are subject to the same rules that apply to traditional IRAs. ‚Ä®

SIMPLE IRAs

Yet another type of IRA is the SIMPLE IRA. SIMPLE IRAs may be established only by an employer on behalf of its employees. If you are a sole proprietor, you are deemed to employ yourself for these purposes and may establish a SIMPLE IRA in your own name as the employer. If you are a partner in a partnership, LLC member or owner of an incorporated business, the SIMPLE IRA must be established by your business, not you personally.

Contributions to SIMPLE IRAs are divided into two parts. You may contribute:

  • Up to 100 percent of your net income from your business up to an annual limit‚ the contribution limit is $13,000 plus an addition $3,000 if you are age 50 or older.
  • And a matching employer contribution up to 3 percent of your net business income.

If you establish a SIMPLE IRA, you are not allowed to have any other retirement plans for your business (although you may still have an individual IRA). SIMPLE IRAs are easy to set up and administer and will enable you to make larger annual contributions than a SEP plan if you earn less than $10,000 per year from your business.

Keogh plans

Keogh plans are only for business owners who are sole proprietors, partners in partnerships or limited liability company members. You can't have a Keogh if you incorporate your business. Keoghs require more paperwork to set up than employer IRAs, but they also offer more options: You can contribute more to these plans and still get an income tax deduction for your contributions.

There are two basic types of Keogh plans:

  • Defined contribution plans, in which benefits are based on the amount contributed to and accumulated in the plan.
  • Defined benefit plans, which provide for a set benefit upon retirement.

There are two types of defined contribution plans: profit sharing plans and money purchase plans. These plans can be used separately or in tandem with one another. You can contribute up to 20 percent of your net self-employment income to a profit-sharing Keogh plan, up to a maximum of $53,000 per year in 2015. You can contribute any amount up to the limit each year or not contribute at all.

In a money purchase plan, you contribute a fixed percentage of your net self-employment earnings every year. You decide how much to contribute each year. Make sure you will be able to afford the contributions each year because you can't skip them, even if your business earns no profit for the year.

In return for giving up flexibility, self-employed small business owners can contribute a higher percentage of their earnings with a money purchase plan: the lesser of 25 percent of compensation or $56,000 (the same maximum amount as the profit-sharing plan).

Solo 401(k) Plans

Any business owner who has no employees (other than a spouse) can establish a solo self-employed 401(k) plan (also called a one-person or individual 401(k)). Solo 401(k) plans fit business owners without employees.

Solo 401(k) plans have the following advantages over other retirement plans:

  • You can make very large contributions‚ as much as 20 percent of your net profit from self-employment, plus an elective.
  • A deferral contribution of up to $19,000. The maximum contribution per year is $56,000. Business owners over 50 may make additional catch-up contributions of up to $5,000 per year that do not count toward the $53,000 limit.
  • You can borrow up to $50,000 from your solo 401(k) plan, as long as you repay the loan within five years (you cannot borrow from a traditional IRA, Roth IRA, SEP-IRA, or SIMPLE IRA.

Having employees complicates matters tremendously

If you own your own business and have no employees (other than your spouse), you can probably choose, establish and administer your own retirement plan with little or no assistance. The instant you add employees to the mix, however, virtually every aspect of your plan becomes more complex. This is primarily due to something called nondiscrimination rules. These rules ensure that your retirement plan benefits all employees, not just you. In general, the laws prohibit you from doing the following:

  • Making disproportionately large contributions for some plan participants (like yourself) and not for others
  • Unfairly excluding certain employees from participating in the plan, and
  • Unfairly withholding benefits from former employees or their beneficiaries

If the IRS finds the plan to be discriminatory at any time (usually during an audit), the plan could be disqualified‚ that is, determined not to satisfy IRS rules. If this happens, you and your employees will owe income tax and probably penalties, as well.

Having employees also increases the plan’s reporting requirements. You must provide employees with a summary of the terms of the plan, notification of any changes you make, and an annual report of contributions. And you must file an annual tax return. Because of all the complex issues raised by having employees, any business owner with employees (other than a spouse) should seek professional help when creating a retirement plan.

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The best retirement plans of 2024

Maryalene LaPonsie

Hannah Alberstadt

Hannah Alberstadt

“Verified by an expert” means that this article has been thoroughly reviewed and evaluated for accuracy.

Updated 6:02 p.m. UTC Feb. 13, 2024

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American workers have no shortage of options for selecting the best retirement plan.

  • Most people are eligible for more than one retirement plan.
  • 2024 retirement plans generally offer tax advantages. 

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Retirement is the end goal for most workers, but you can’t quit your job unless you have a source of income. While Social Security will pay for some expenses, the government says these benefits will cover only about 40% of your pre-retirement income.

In the past, many companies offered pensions that provided lifetime income to loyal employees. Now, pensions have all but disappeared, and most workers need to rely on their savings to fill gaps in their budgets.

Fortunately, several retirement plans are available, many of which offer attractive tax incentives or generous employer matches.

Best retirement plans of 2024

“You’re talking about an embarrassment of riches,” says Andrew Meadows, senior vice president of HR, brand and culture for Ubiquity Retirement + Savings, a 401(k) provider.

Plans exist for employees, self-employed individuals and small-business owners. Options within each category allow people to receive immediate tax deductions or set aside money for tax-free withdrawals in the future. The best retirement plans also offer various investment options with low fees. 

Employer-sponsored retirement plans

Employer-sponsored retirement plans are some of the best-known options, and if you are an employee — meaning you receive a W-2 at tax time — you likely have access to one of them.

These accounts can be a convenient way to save for retirement since payroll deductions fund them. Plus, many employers match a portion of employee contributions.

“You want to be sure you put enough in to qualify for whatever your employer is matching,” says Stuart Chamberlin, founder and owner of advisory firm Chamberlin Financial in Boca Raton, Florida.

Traditional 401(k)

Traditional 401(k)s are the most common retirement plans private companies offer employees.

Employee contributions to a traditional 401(k) are tax-deductible. You can access the money without penalty once you reach age 59½, and withdrawals are taxed as regular income. You must start taking required minimum distributions at age 73, meaning you cannot avoid taxes forever.

You can contribute up to $23,000 to a 401(k) plan in 2024. Savers age 50 or older can contribute an additional $7,500.

Roth 401(k)

A Roth 401(k) works like a traditional 401(k), except the tax benefits are different.

Because Roth accounts are funded with after-tax dollars, employee contributions are not tax-deductible. The benefit is that the money grows tax-free and can be withdrawn tax-free in retirement. If you make a withdrawal before age 59½ and before you have held the account for five years, some of it may be subject to income tax and a penalty.

Roth 401(k) contribution limits are the same as traditional 401(k) contribution limits.

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A 403(b) , also known as a tax-sheltered annuity, works like a 401(k) and may be offered in traditional and Roth versions. Typically, 403(b) plans are available to employees of public schools and certain tax-exempt organizations.

One unique provision of 403(b) plans is that workers with at least 15 years of service can make additional catch-up contributions, which may be worth up to $3,000. 

457(b) 

Employees of state and local governments and certain tax-exempt nongovernmental entities may be able to contribute to 457(b) plans. These accounts work like 401(k)s and can be found in traditional and Roth varieties.

Like 403(b)s, 457(b)s have a unique catch-up feature. Workers may be able to contribute up to twice the annual employee limit during the last three years before their normal retirement age. 

Thrift savings plan

The thrift savings plan is a retirement plan for federal government employees and uniformed members of the armed forces. It is comparable to a 401(k) account, with similar provisions and contribution limits. 

Individual retirement plans

Individual retirement arrangements, or IRAs, “have the lowest barrier to entry,” Meadows says.

You generally can open an IRA as long as you have earned income, even if you have a 401(k) plan or another workplace retirement account. But note that income limits may apply to deducting traditional IRA contributions and contributing to Roth IRAs.

Traditional IRA

Like a traditional 401(k), a traditional IRA offers an immediate tax deduction on contributions. Withdrawals after age 59½ are subject to regular income tax. Early withdrawals are subject to income tax and a 10% penalty. Required minimum distributions must begin at age 73.

You can contribute up to $7,000 to IRAs in 2024. Savers age 50 or older may make an additional $1,000 in catch-up contributions.

Your contributions may not be tax-deductible if you or your spouse is covered by a retirement plan at work and you exceed certain income limits. For 2024, the ability to deduct contributions begins to phase out at modified adjusted gross incomes above $77,000 for single filers and $123,000 for married couples filing jointly.

Roth IRAs don’t offer tax deductions on contributions, but withdrawals in retirement are generally tax-free. Further, because you’ve already paid taxes on your Roth IRA contributions, you can withdraw them anytime tax- and penalty-free. Early withdrawals of your earnings may be subject to income tax and a 10% penalty. 

Roth IRAs share the same contribution limits as traditional IRAs, but high earners are excluded from funding these plans. For 2024, the ability to contribute to a Roth IRA begins to phase out at MAGIs of $146,000 for single filers and $230,000 for married couples filing jointly. At incomes of $161,000 and $240,000, respectively, the opportunity to contribute to a Roth IRA is eliminated.  

Spousal IRA

A spousal IRA refers to the ability of a working spouse to open an IRA on behalf of a nonworking spouse. In this way, stay-at-home parents or other spouses without earned income can have their own IRAs with which to save for retirement.

Spousal IRAs can be traditional or Roth accounts and are subject to the same contribution and income limits as other IRAs. To open a spousal IRA, a couple must file their tax return jointly.

Rollover IRA 

A rollover IRA is a way to move money from one retirement account to another. For example, if you leave a job, you can roll over money from your 401(k) to an IRA rather than leave it in place.

You can opt for a direct rollover or an indirect rollover. With a direct rollover, the funds are transferred from the 401(k) administrator to the IRA administrator. With an indirect rollover, you receive a distribution from the 401(k) and then deposit the funds into the IRA. If you fail to deposit the full amount into the IRA within 60 days, it may be subject to both income taxes and a 10% penalty.

There is no limit on how much you can roll over. Note that rolling over into an account with a different tax treatment — from a traditional to a Roth, for instance — counts as a conversion and has tax implications.

Retirement plans for small-business owners and the self-employed 

One drawback of IRAs compared to employer-sponsored retirement plans is the low annual contribution limit. But if you are self-employed or a small-business owner, you have other options with higher limits. Becoming eligible for these plans may be easier than you think.

“If you have a side hustle and self-employment income, you absolutely have the ability to start your own retirement plan,” says Nathan Boxx, director of retirement plan services for financial advisory firm Fort Pitt Capital Group in Pittsburgh.

Whether you work for yourself or have a team of employees, the following accounts could be good options. 

Any self-employed individual or employer can open a SEP IRA , and workers can contribute the lesser of 25% of their annual compensation or $69,000 per year. That puts a SEP IRA in line with a 401(k) plan in terms of contributions. But you can’t make catch-up contributions to a SEP account.

There is no Roth SEP IRA option, so your contributions will be tax-deductible. Withdrawals in retirement will be subject to regular income tax, and you’ll also need to start taking RMDs at age 73.

If you like the idea of having some tax-free money available in retirement, there is no reason you can’t also open a Roth IRA. The IRS allows self-employed workers and business owners to contribute to both.

The SIMPLE IRA is what Boxx calls the “quick and dirty” option for small-business retirement plans. It is available to businesses with fewer than 100 workers and has few filing requirements.

“The trade-off is lack of flexibility,” Boxx says. You may not have the same plan or investment options that other accounts offer. SIMPLE IRAs also have lower contribution limits than 401(k)s.

In 2024, a worker can contribute up to $16,000 to a SIMPLE IRA. Savers age 50 or older can make $3,500 in catch-up contributions. All contributions are tax-deductible, and withdrawals in retirement are taxed as regular income. RMDs must be taken starting at age 73. 

Payroll deduction IRA

Payroll deduction IRAs can be traditional or Roth and have the same contribution limits as those accounts. The main difference is they are funded through payroll deductions.

These accounts can be an attractive option for small-business owners who would like to help their workers save for retirement but don’t want the expense that comes with creating a 401(k) plan. 

Solo 401(k) 

Also known as one-participant 401(k)s, solo 401(k)s allow business owners with no employees or self-employed individuals to open an employer-sponsored plan for themselves and their spouses.

The reporting rules make these accounts more complex than some of the other options. On the other hand, they have significantly higher contribution limits.

As an employee, you can make elective deferrals of up to $23,000 in 2024. Savers age 50 or older can contribute an additional $7,500. In addition, as an employer, you can make a profit-sharing contribution of up to 25% of your compensation from the business. Combined, the maximum solo 401(k) contribution is $69,000 in 2024. 

Solo 401(k)s may be opened as traditional or Roth accounts.

Why is having a retirement plan important?

Most people understand the value of having money set aside for retirement, but it may not be obvious why you should use a retirement plan. After all, you could invest the money in a regular brokerage account , put it in certificates of deposit or leave it in your savings account.

A retirement plan makes more sense for several reasons:

  • Retirement plans offer tax incentives — either deductions for contributions or tax-free withdrawals in retirement.
  • Your employer may match a portion of your contributions. That’s essentially free money to boost your savings.
  • Retirement plans are subject to certain standards and protections by law.

“Retirement money is sheltered from creditors up to a certain threshold,” Boxx says. That is one example of the type of protection your money gets when deposited in a retirement plan.

How to start investing in your retirement

The earlier you begin saving, the more likely you are to be financially secure in retirement. It isn’t hard to open a retirement account either.

If you work somewhere that offers employer-sponsored retirement accounts, contact your human resources office to start making contributions. Most plans let you choose from several investment options, and many now have target-date funds, which make it simple to invest based on your expected retirement date.

IRAs and other plans can be opened online or in person at many banks and brokerage firms. For instance, Ubiquity Retirement + Savings offers solo 401(k) plans, while Chase, Charles Schwab and Fidelity all have IRAs.   

How to choose the best retirement plan for you

If you have an employer-sponsored plan with a match, start there. You want to contribute enough to that plan to get the full match. After that, you can consider other options.

Here are some questions to ask yourself:

  • Do I do any contract work that would make me eligible for a small-business retirement plan?
  • How much do I expect to be able to contribute each year?
  • Do I want a tax deduction now, or would I rather have tax-free money in retirement?

Before you jump into any account, be sure to read the fine print. “What fees are you paying?” Meadows asks. Those fees include the expense ratios for specific investments and the costs to administer the plan.

An accountant or financial advisor can help you weigh your options and select the best retirement plan for your needs. 

Frequently asked questions (FAQs)

That depends on your unique circumstances. While Fidelity Investments suggests you save 10 times your income by age 67, you may need more or less to retire comfortably.

When determining how much money you’ll need, consider the following:

  • Whether you will have debt payments in retirement.
  • The cost of living in your area.
  • Your expected lifestyle.
  • How you will fill your time.
  • Your expected lifespan.

Each account has its pros and cons. IRAs typically offer more investment options, but they may come with more fees. With a 401(k) account, you can contribute significantly more, and your plan administrator is a fiduciary, meaning they are required to work in your best interest. Talk to a trusted financial advisor to decide which is right for you. 

Yes. “The IRS always gets theirs at the end,” Chamberlin says.

The difference is when you pay those taxes. Roth accounts are taxed upfront since you fund them with after-tax dollars. With a traditional account, the money isn’t taxed until you make withdrawals in retirement. If you die with money in a traditional account, your heirs will pay the taxes on the remaining amount.

Blueprint is an independent publisher and comparison service, not an investment advisor. The information provided is for educational purposes only and we encourage you to seek personalized advice from qualified professionals regarding specific financial decisions. Past performance is not indicative of future results.

Blueprint has an advertiser disclosure policy . The opinions, analyses, reviews or recommendations expressed in this article are those of the Blueprint editorial staff alone. Blueprint adheres to strict editorial integrity standards. The information is accurate as of the publish date, but always check the provider’s website for the most current information.

Maryalene LaPonsie

Maryalene LaPonsie has been writing professionally for nearly 25 years and specializes in personal finance, retirement, investing and education topics. In addition to USA TODAY Blueprint, her work has been featured on Forbes Advisor, U.S. News & World Report, Money Talks News, MSN and elsewhere on the web.

Hannah Alberstadt is the deputy editor of investing and retirement at USA TODAY Blueprint. She was most recently a copy editor at The Hill and previously worked in the online legal and financial content spaces, including at Student Loan Hero and LendingTree. She holds bachelor's and master's degrees in English literature, as well as a J.D. Hannah devotes most of her free time to cat rescue.

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Saving for Retirement When You’re Self-Employed: SEP IRAs, SIMPLE IRAs and Other Plans NerdWallet's Smart Money Podcast

Learn retirement savings strategies tailored for self-employed individuals to secure a financially stable future. How can self-employed individuals effectively save for retirement? What tailored retirement plans should freelancers and small business owners consider? NerdWallet’s Sean Pyles and Elizabeth Ayoola discuss the unique challenges of retirement savings for the self-employed and the different retirement plans available to help you understand how to secure your financial future while running your own business. They begin with a discussion of the hurdles of inconsistent income and strategies to manage expenses, with tips and tricks on proactive contribution, the transformative power of compounding interest, and paying oneself a consistent salary. Ayesha Selden, a stock broker, certified financial planner, real estate investor, and art collector,  joins Elizabeth to discuss the intricacies of various retirement accounts for the self-employed. They delve into the benefits of using qualified plans like solo 401(k)s, SEP IRAs, and SIMPLE IRAs, aligning retirement plans with business models, and the strategy of funding retirement through the sale of a business. They also highlight the importance of diversification to mitigate risks, building strong savings habits early on, and the potential of setting a consistent salary for financial stability. In their conversation, the Nerds discuss: retirement savings, self-employed financial planning, retirement plans, retirement strategy, retirement contributions, solo 401(k), SEP IRA, SIMPLE IRA, compounding interest, certified financial planner, financial independence, retirement planning strategies, saving for retirement, business owners, retirement savings options, tax-deferred investments, managing expenses, investment diversification, retirement funding options, self-employment tax, financial management, employee and employer contributions, retirement accounts, consistent salary, fluctuating income, wealth management, retirement savings habits, retirement savings goals, employer matching, retirement savings accounts, retirement nest egg, saving habits, retirement planning advice, self-employment benefits, maximizing retirement savings, investment vessels, financial foresight, and retirement income streams. To send the Nerds your money questions, call or text the Nerd hotline at 901-730-6373 or email [email protected]. Like what you hear? Please leave us a review and tell a friend.

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What You Need to Know About Running a Business in Retirement

Apply your knowledge, experience and business skills to supplement your income and stay fulfilled.

How to Run a Business in Retirement

Busy senior entrepreneur talking to supplier and examining file on tablet while working in own shop

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Since only about half of new establishments will last five years, retirees should avoid raiding their retirement savings to start a business.

It isn't uncommon for retirees to start their own business . Trey Peterson, a financial professional with investment firm Guardian Wealth Strategies in Burnsville, Minnesota, estimates 40% to 50% of his retired clients end up starting businesses or consulting. After six months of retirement, they become bored and decide to try a new endeavor, he says. However, before you make the leap to business ownership, you should understand a few key factors and characteristics that lead to long-term success and fulfillment .

Here's what you need to know about running a business in retirement:

  • Your vision might not match reality.
  • A business mentor can provide tried-and-true advice.
  • You shouldn't deplete your savings to start a business.
  • Employees add layers of complexity.
  • You should have clear guidelines for measuring success.
  • Tax laws can vary by location and business type.
  • You need an exit plan.

Your Vision Might Not Match Reality

It can be a mistake to jump into business ownership in a field unrelated to your previous work experience. "I recommend working part time or alongside someone who is already doing what you want to do," Peterson says. That can help you avoid sinking money into an endeavor that ends up being different than anticipated. Peterson recalls one client who thought a business in the wellness industry would be a perfect fit for her, but after three months in a related part-time job, she realized it wasn't actually what she wanted to do in retirement . Retirees may discover they need to adjust the business model of the industry they plan to pursue. Or they may even give up the dream of owning a business once they learn more about what is involved in running a company.

A Business Mentor Can Provide Tried-and-True Advice

Enlisting the help of an experienced business professional can help you avoid costly mistakes. "You need to know what you're getting into," says Dawn-Marie Joseph, president of Estate Planning & Preservation in Williamston, Michigan. Mentors may be able to answer questions about starting a new business, buying an existing one and how to manage daily operations. Free mentoring is available through SCORE, a nonprofit partner of the U.S. Small Business Administration.

You Shouldn't Deplete Your Savings to Start a Business

Retirees may be tempted to raid their 401(k) plan , IRA or other savings accounts to cover startup costs. However, only about half of new establishments will last five years, according to Small Business Administration data from 2006 to 2017. Limit how much you pull out of savings to avoid the possibility of losing your nest egg should your business fold. "You do not want to pull more than 5% of your retirement assets," recommends Bryan Bibbo, a financial fiduciary with the advisory firm The JL Smith Group in Avon, Ohio. Those who need more money may want to consider a business loan or a line of credit.

Employees Add Layers of Complexity

Restaurants, retail shops and other businesses requiring employees can be subject to a myriad of state and federal rules. "Along with employees comes paperwork," Joseph says. Business owners need to collect W-4 forms with employee Social Security numbers, withhold taxes and process payroll. Plus, there may be requirements such as workers compensation insurance, unemployment taxes and workplace benefits to manage. An experienced accountant can provide assistance with these and other financial matters.

You Should Have Clear Guidelines for Measuring Success

Many people go into business ownership without a clear idea of how they'll define success. Peterson suggests business owners create three benchmarks that define great, good and poor business performance. These benchmarks may be related to income, profit or another metric. Defining poor business performance in advance can be helpful in deciding when to abandon a failing venture. "A lot of people make the mistake of trying to keep a dead business alive," Peterson says.

Tax Laws Can Vary by Location and Business Type

There is no simple answer as to what taxes and laws apply to your company. "Before you start the business, talk to an accountant or lawyer about how businesses can be set up and taxed," Bibbo says. For instance, the corporate tax rate and filing requirements are significantly different than what is required of sole proprietors who can use a Schedule C on their personal income tax forms . Eligibility for tax cuts such as the qualified business income tax deduction can also depend on how you structure your firm. What's more, businesses selling goods in stores and online may need to collect sales tax. Some cities and states also require businesses to obtain permits and meet certain zoning requirements.

You Need an Exit Plan

When you start or buy a business, you also need to know how to end or sell it. Bibbo says every business owner must be able to answer the following: "When are you going to get out and what does that look like?" That may mean selling the business when revenues hit a certain level, passing it on to children at a specific age or folding up shop when it becomes too time-consuming.

Part-Time Retirement Jobs That Pay Well

Senior businesswoman is doing paperwork in her stock factory.

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FinanceBuzz

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7 IRS Changes for 2024 That Will Impact Your Retirement Accounts

Posted: February 5, 2024 | Last updated: February 6, 2024

<p>Every tax year, the Internal Revenue Service makes changes to the tax code that impact taxpayers across the nation — including anyone saving for retirement.</p><p>Even if you haven’t filed your taxes for 2023 yet, it’s important to get up to date on the most recent tax code changes as soon as possible so you can continue to <a href="https://financebuzz.com/manage-money-retirement-with-500000?utm_source=msn&utm_medium=feed&synd_slide=1&synd_postid=16012&synd_backlink_title=maximize+your+retirement+savings&synd_backlink_position=1&synd_slug=manage-money-retirement-with-500000">maximize your retirement savings</a>.</p><p>Below, we’ll catch you up on the most recent changes made by the IRS that could impact <a href="https://financebuzz.com/retire-early-quiz?utm_source=msn&utm_medium=feed&synd_slide=1&synd_postid=16012&synd_backlink_title=your+retirement+plans&synd_backlink_position=2&synd_slug=retire-early-quiz">your retirement plans</a> for 2024. </p><p>  <p><a href="https://www.financebuzz.com/money-moves-retirees?utm_source=msn&utm_medium=feed&synd_slide=1&synd_postid=16012&synd_backlink_title=Smart+Strategies%3A+Experts+reveal+what+may+be+the+%22Top+8%22+habits+of+early+retirees&synd_backlink_position=3&synd_slug=money-moves-retirees"><b>Smart Strategies:</b> Experts reveal what may be the "Top 8" habits of early retirees</a> </p> </p>

Every tax year, the Internal Revenue Service makes changes to the tax code that impact taxpayers across the nation — including anyone saving for retirement.

Even if you haven’t filed your taxes for 2023 yet, it’s important to get up to date on the most recent tax code changes as soon as possible so you can continue to maximize your retirement savings .

Below, we’ll catch you up on the most recent changes made by the IRS that could impact your retirement plans for 2024.

Smart Strategies: Experts reveal what may be the "Top 8" habits of early retirees

<p>For the 2023 tax year, the maximum amount individuals could contribute to a 401(k) or Individual Retirement Account was $22,500.</p><p>This year — effective January 1, 2024 — retirement savers can put up to $23,000 in pre-tax dollars into their IRA.</p><p>  <p class=""><a href="https://financebuzz.com/choice-home-warranty-jump?utm_source=msn&utm_medium=feed&synd_slide=2&synd_postid=16012&synd_backlink_title=Avoid+costly+repairs%3A++Unexpected+appliance+breakdowns+can+cost+%241%2C000s+of+dollars+to+fix.&synd_backlink_position=4&synd_slug=choice-home-warranty-jump"><b>Avoid costly repairs: </b> Unexpected appliance breakdowns can cost $1,000s of dollars to fix.</a></p>  </p>

Maximum contribution amounts for 401(k)s have gone up

For the 2023 tax year, the maximum amount individuals could contribute to a 401(k) or Individual Retirement Account was $22,500.

This year — effective January 1, 2024 — retirement savers can put up to $23,000 in pre-tax dollars into their IRA.

Avoid costly repairs: Unexpected appliance breakdowns can cost $1,000s of dollars to fix.

<p>While 401(k)s are among the most common types of savings plans, they aren’t the only retirement savings options available.</p><p>You may have also been stashing money away in a 403(b), 457, or federal Thrift Savings Plan. If so, the same limit increase applies: You may contribute an extra $500 to your savings account this year compared to 2023.</p>

403(b)s, most 457s, and Thrift Savings Plans maximum contributions have gone up

While 401(k)s are among the most common types of savings plans, they aren’t the only retirement savings options available.

You may have also been stashing money away in a 403(b), 457, or federal Thrift Savings Plan. If so, the same limit increase applies: You may contribute an extra $500 to your savings account this year compared to 2023.

<p>Unlike money saved in traditional IRAs, cash set aside for a Roth IRA is taxed preemptively rather than when you cash it out in retirement.</p><p>Contribution limits are different for Roth IRAs than traditional accounts, and the max contribution amount for Roths has increased by 7.6% to a total of $7,000 for the year.</p><p>  <a href="https://www.financebuzz.com/supplement-income-55mp?utm_source=msn&utm_medium=feed&synd_slide=4&synd_postid=16012&synd_backlink_title=Make+Money%3A+8+things+to+do+if+you%27re+barely+scraping+by+financially&synd_backlink_position=5&synd_slug=supplement-income-55mp"><b>Make Money:</b> 8 things to do if you're barely scraping by financially</a><br>  </p>

Maximum Roth IRA contributions have increased

Unlike money saved in traditional IRAs, cash set aside for a Roth IRA is taxed preemptively rather than when you cash it out in retirement.

Contribution limits are different for Roth IRAs than traditional accounts, and the max contribution amount for Roths has increased by 7.6% to a total of $7,000 for the year.

Make Money: 8 things to do if you're barely scraping by financially

<p>Small-business owners can’t always afford to offer their employees 401(k) plans with employer matches. The IRA’s new starter 401(k) plan functions like a typical 401(k) but doesn’t require employer matches.</p><p>Its limits are also lower: Employees may contribute up to $6,000 a year plus an extra $1,000 once they’re over 50.</p>

Starter 401(k) plans are an option for small businesses that can’t afford to offer employee matches

Small-business owners can’t always afford to offer their employees 401(k) plans with employer matches. The IRA’s new starter 401(k) plan functions like a typical 401(k) but doesn’t require employer matches.

Its limits are also lower: Employees may contribute up to $6,000 a year plus an extra $1,000 once they’re over 50.

<p>Before this year, employees working on paying off their student loans needed to contribute to a 401(k) to qualify for any employer match.</p><p>Thanks to new legislation, SECURE 2.0, as long as employees are paying off debt related to “qualified student loan payments” (tuition, fees, books, and expenses), they may receive matching retirement contributions counted as “elective deferrals.”</p><p>The same rules that apply to a company’s 401(k) employer match now apply to student loan payments, giving student loan payers the chance to start saving money.</p>

Students paying off federal student loans are eligible for employer 401(k) matches

Before this year, employees working on paying off their student loans needed to contribute to a 401(k) to qualify for any employer match.

Thanks to new legislation, SECURE 2.0, as long as employees are paying off debt related to “qualified student loan payments” (tuition, fees, books, and expenses), they may receive matching retirement contributions counted as “elective deferrals.”

The same rules that apply to a company’s 401(k) employer match now apply to student loan payments, giving student loan payers the chance to start saving money.

<p>Until this year, with very few exceptions, anyone withdrawing money from a 401(k) account before age 59.5 would have to pay a 10% penalty (on top of paying the taxes associated with the account).</p><p>However, with the 2024 changes, individuals are allowed to withdraw up to $1,000 a year if they or their families have experienced a financial emergency within the last year.</p><p>Based on the new rules, you don’t have to pay the 10% penalty as long as you pay the money back to the account within three years.</p><p>  <a href="https://www.financebuzz.com/top-high-yield-savings-accounts?utm_source=msn&utm_medium=feed&synd_slide=7&synd_postid=16012&synd_backlink_title=Earn+More%3A+Boost+your+savings+with+one+of+the+best+high+yield+savings+accounts&synd_backlink_position=6&synd_slug=top-high-yield-savings-accounts"><b>Earn More:</b> Boost your savings with one of the best high yield savings accounts</a>  </p>

There is no longer a 10% penalty for early withdrawals if you’ve experienced a financial emergency

Until this year, with very few exceptions, anyone withdrawing money from a 401(k) account before age 59.5 would have to pay a 10% penalty (on top of paying the taxes associated with the account).

However, with the 2024 changes, individuals are allowed to withdraw up to $1,000 a year if they or their families have experienced a financial emergency within the last year.

Based on the new rules, you don’t have to pay the 10% penalty as long as you pay the money back to the account within three years.

Earn More: Boost your savings with one of the best high yield savings accounts

<p>If an individual self-certifies that they were a victim of domestic abuse, they may make a withdrawal without paying the 10% penalty.</p><p>The total amount that may be withdrawn is either up to $10,000 or 50% of the total amount of money in the account — whichever sum is smaller.</p>

The 10% penalty is also waived for domestic abuse survivors

If an individual self-certifies that they were a victim of domestic abuse, they may make a withdrawal without paying the 10% penalty.

The total amount that may be withdrawn is either up to $10,000 or 50% of the total amount of money in the account — whichever sum is smaller.

<p>If you aren’t already maxing out your retirement savings contributions, the start of a new tax year — complete with new contribution limits — is the perfect time to start.</p><p>Remember, taking advantage of increased contribution limits is one of the essential <a href="https://financebuzz.com/manage-money-retirement-with-500000?utm_source=msn&utm_medium=feed&synd_slide=9&synd_postid=16012&synd_backlink_title=retirement+planning+moves&synd_backlink_position=7&synd_slug=manage-money-retirement-with-500000">retirement planning moves</a> that can have a lasting impact on whether you can retire early or not.</p><p>  <p><b>More from FinanceBuzz:</b></p> <ul> <li><a href="https://financebuzz.com/supplement-income-55mp?utm_source=msn&utm_medium=feed&synd_slide=9&synd_postid=16012&synd_backlink_title=7+things+to+do+if+you%27re+scraping+by+financially.&synd_backlink_position=8&synd_slug=supplement-income-55mp">7 things to do if you're scraping by financially.</a></li> <li><a href="https://www.financebuzz.com/shopper-hacks-Costco-55mp?utm_source=msn&utm_medium=feed&synd_slide=9&synd_postid=16012&synd_backlink_title=6+genius+hacks+Costco+shoppers+should+know.&synd_backlink_position=9&synd_slug=shopper-hacks-Costco-55mp">6 genius hacks Costco shoppers should know.</a></li> <li><a href="https://financebuzz.com/retire-early-quiz?utm_source=msn&utm_medium=feed&synd_slide=9&synd_postid=16012&synd_backlink_title=Can+you+retire+early%3F+Take+this+quiz+and+find+out.&synd_backlink_position=10&synd_slug=retire-early-quiz">Can you retire early? Take this quiz and find out.</a></li> <li><a href="https://financebuzz.com/choice-home-warranty-jump?utm_source=msn&utm_medium=feed&synd_slide=9&synd_postid=16012&synd_backlink_title=Are+you+a+homeowner%3F+Get+a+protection+plan+on+all+your+appliances.&synd_backlink_position=11&synd_slug=choice-home-warranty-jump">Are you a homeowner? Get a protection plan on all your appliances.</a></li> </ul>  </p>

Bottom line

If you aren’t already maxing out your retirement savings contributions, the start of a new tax year — complete with new contribution limits — is the perfect time to start.

Remember, taking advantage of increased contribution limits is one of the essential retirement planning moves  that can have a lasting impact on whether you can retire early or not.

More from FinanceBuzz:

  • 7 things to do if you're scraping by financially.
  • 6 genius hacks Costco shoppers should know.
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