Brenda Vingiello, Sand Hill’s Chief Investment Officer, joined Squawk Box to discuss her thoughts on the latest market trends and market outlook for 2025. This
Retirement Planning: A Standout Plan for the Self-Employed
Published Date : March 3, 2015
As financial advisors to a broad variety of clients, it is common for us to work with clients with all levels of career experience who are earning income as freelance or self-employed workers. While many of us are familiar with company-sponsored 401(k) plans and traditional IRAs, fewer of us are familiar with individual (or solo) 401(k)s and SEP IRAs. Self-employed individuals, particularly those who do not have employees (except perhaps a spouse working in the business), may want to consider reducing their net taxable income and maximizing annual tax deferred savings by establishing an individual 401(k) or SEP IRA (Simplified Employee Pension). While the two plans are similar in many ways, there are also important differences: for example, an individual 401(k) potentially allows larger contributions than a SEP IRA.
Individual 401(k)s have gained in popularity for the self-employed over the last few years and many significant financial service companies, such as Schwab and Fidelity, now offer plans. As a self-employed individual, the owner/operator is both an employee and employer of the business. As employee, he or she can contribute up to 100% of W-2 compensation, with a maximum of $18,000. That contribution limit rises to $24,000 for those over age 50. At the employer level, an additional profit sharing contribution is allowed of up to 25% of W-2 wages, or 20% of net business income. The combined maximum contribution limit of $53,000 per year jumps to a combined maximum of $59,000 for individuals over age 50 (Source: www.irs.gov). The dual status of the owner/operator as employee and employer is a feature unique to the individual 401(k) and results in an individual achieving the maximum contribution levels more quickly than is true under a SEP IRA. According to the IRS, individual 401(k)s also allow the participant to borrow up to 50% of the account balance, not to exceed $50,000, subject to guidelines on interest rates and terms. In effect, the business owner borrows from him or herself. The employee contribution to the 401(k) must be made by December 31st, while consistent with SEP IRAs employer contributions are due by the tax return filing date, even if the date is extended. With greater opportunity comes a degree of added complexity administratively.
By contrast, under a SEP IRA, self-employed individuals may contribute 25% of their W-2 earnings or 20% of net self-employment income, up to the $53,000 maximum (Source: www.irs.gov). Much like the individual 401(k), the account owner is not required to make annual contributions and therefore saving can happen when and if the business is profitable. Setting up a SEP IRA is just about as simple as opening a brokerage account. Ongoing administrative fees or responsibilities are minimal. Interestingly, SEP IRAs can be converted to individual 401(k)s with the plan custodian. Both individual 401(k)s and SEP IRAs are ideal tax deferred savings vehicles for the self-employed. Reaching the maximum allowable contribution more quickly is a clear benefit of individual 401(k)s.
Sand Hill Wealth Managers are happy to explore in more detail these retirement savings options to help determine the right choice for you.
Articles and Commentary
Information provided in written articles are for informational purposes only and should not be considered investment advice. There is a risk of loss from investments in securities, including the risk of loss of principal. The information contained herein reflects Sand Hill Global Advisors' (“SHGA”) views as of the date of publication. Such views are subject to change at any time without notice due to changes in market or economic conditions and may not necessarily come to pass. SHGA does not provide tax or legal advice. To the extent that any material herein concerns tax or legal matters, such information is not intended to be solely relied upon nor used for the purpose of making tax and/or legal decisions without first seeking independent advice from a tax and/or legal professional. SHGA has obtained the information provided herein from various third party sources believed to be reliable but such information is not guaranteed. Certain links in this site connect to other websites maintained by third parties over whom SHGA has no control. SHGA makes no representations as to the accuracy or any other aspect of information contained in other Web Sites. Any forward looking statements or forecasts are based on assumptions and actual results are expected to vary from any such statements or forecasts. No reliance should be placed on any such statements or forecasts when making any investment decision. SHGA is not responsible for the consequences of any decisions or actions taken as a result of information provided in this presentation and does not warrant or guarantee the accuracy or completeness of this information. No part of this material may be (i) copied, photocopied, or duplicated in any form, by any means, or (ii) redistributed without the prior written consent of SHGA.
Video Presentations
All video presentations discuss certain investment products and/or securities and are being provided for informational purposes only, and should not be considered, and is not, investment, financial planning, tax or legal advice; nor is it a recommendation to buy or sell any securities. Investing in securities involves varying degrees of risk, and there can be no assurance that any specific investment will be profitable or suitable for a particular client’s financial situation or risk tolerance. Past performance is not a guarantee of future returns. Individual performance results will vary. The opinions expressed in the video reflect Sand Hill Global Advisor’s (“SHGA”) or Brenda Vingiello’s (as applicable) views as of the date of the video. Such views are subject to change at any point without notice. Any comments, opinions, or recommendations made by any host or other guest not affiliated with SHGA in this video do not necessarily reflect the views of SHGA, and non-SHGA persons appearing in this video do not fall under the supervisory purview of SHGA. You should not treat any opinion expressed by SHGA or Ms. Vingiello as a specific inducement to make a particular investment or follow a particular strategy, but only as an expression of general opinion. Nothing presented herein is or is intended to constitute investment advice, and no investment decision should be made based solely on any information provided on this video. There is a risk of loss from an investment in securities, including the risk of loss of principal. Neither SHGA nor Ms. Vingiello guarantees any specific outcome or profit. Any forward-looking statements or forecasts contained in the video are based on assumptions and actual results may vary from any such statements or forecasts. SHGA or one of its employees may have a position in the securities discussed and may purchase or sell such securities from time to time. Some of the information in this video has been obtained from third party sources. While SHGA believes such third-party information is reliable, SHGA does not guarantee its accuracy, timeliness or completeness. SHGA encourages you to consult with a professional financial advisor prior to making any investment decision.
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