Self-Employed? Get Ready for a Roth Savings Option

It’s easy to think that self-employed people have less access to retirement benefits than their salaried counterparts. Yet, self-employment has more account options to consider.

Salaried workers may be eligible to participate in their company’s 401(k) retirement savings program. And if neither works, you can always open an IRA or a Roth IRA, but that’s about it.

If you’re self-employed, your retirement savings options include the regular IRA, the Roth IRA, the SIMPLE IRA, and the SEP IRA, with more significant yearly contribution limits than the traditional and Roth IRAs.

Regarding retirement accounts, a SEP IRA is a perfect bet this year. Because you may save up to 25% of your annual earnings (up to a maximum of $66,000) in a SEP IRA, it’s an excellent method to prepare for retirement. This year’s maximum contribution to a traditional or Roth IRA is $6,500 for those under 50 and $7,500 for those 50 or older.

One criticism that can be leveled with SEP IRAs is that they have traditionally not permitted a Roth savings option.

Improvements are being made to SEP IRAs.

You will not receive a tax deduction for the amount you contribute to a Roth IRA. Instead, you enjoy tax-free investment gains and tax-free withdrawals upon retirement age.

The latter is crucial since taxes are a bother when you’re working, but they’re downright crushing when you’re retired and trying to get by on a limited income. So, you should plan to minimize your tax liability in retirement.

In the meantime, a Roth option for SEP IRAs will be available to savers in 2024, allowing them to take advantage of increased contribution limits and tax-free withdrawals. Furthermore, SEP IRAs have all the benefits of Roth IRAs without the limitations.

There are restrictions on how much of your income can go into a Roth IRA. Roth IRA contributions begin to be phased out after annual earnings above $138,000 for single filers or $218,000 for joint filers. This year, people with revenues over $153,000 and $228,000 no longer have the opportunity to contribute to a Roth IRA.

Nevertheless, you may opt for a SEP IRA. In that case, you won’t need to worry about any contribution caps based on your salary. But, regardless of your annual income, a SEP IRA can be funded.

A potential means of financial preservation

You might be used to contributing to a SEP IRA and receiving an immediate tax deduction. It might be challenging to forego that perk. Yet, when you reach retirement age and find your finances tightening, you will likely value the ability to receive tax-free income. In light of the new regulations, switching to a Roth IRA for your SEP IRA may be worthwhile.