How to Meet the Retirement Needs of Your Self-Employed Clients

Retirement planning is high on the minds of Americans in the wake of the COVID-19 pandemic and soaring inflation pushing up consumer prices. While much of the population does not currently have a retirement plan or save, the problem becomes even more complicated for the self-employed who do not have a fallback to fall back on when these are 401(k) or retirement plans.

Financial advisors play a crucial role in helping self-employed clients determine the type of retirement strategy best suited to their circumstances, based on their income level and tax bracket, number of employees, benefits and the costs of obtaining and maintaining the plan, reports US News and World Reports. With a variety of plan options, the choices can be daunting, and working out a retirement plan with a financial advisor can provide self-employed clients with confidence and assurance.

Traditional and Roth IRAs, while less common, are still a viable option if a client is self-employed. The main benefit is that contributions can be deducted at tax time, with annual contribution limits of $6,000 if a client is under age 50 or $7,000 if age 50 or older.

Another option is the solo 401(k), which is for a self-employed person with no employees, although a spouse who works for the company can also contribute. In 2022, an employee can contribute up to $20,500 per year, plus an additional $6,500 if age 50 or older for catch-up purposes; the total amount an employer and employee can contribute is $61,000 plus the additional catch-up amount. What makes these plans attractive is that the self-employed person is considered both employer and employee and can contribute to the plan at the same time. These plans also cover Roth options.

Simplified employee pensions are similar to solo 401(k)s in that the contribution and compensation levels are roughly the same. A notable difference between the two plans, however, is that SEPs do not allow catch-up contributions, nor do they have Roth options. This plan can be used when a client has employees, but they must contribute an equal percentage of salary for each eligible employee.

The Employee Savings Incentive Plan (SIMPLE) IRA allows for both employee and employer contributions with maximum contributions of $14,000 in 2022, plus a $3,000 catch-up for 50 years and over. The employer must generally make matching contributions of up to 3% for all contributing employees, or a flat rate of 2% regardless of employee contributions, but employee contributions can be written off as a business expense .

There is an assortment of retirement plan options for self-employed clients and for financial advisors looking to meet their clients’ income needs. Nationwide offers a variety of actively managed ETFs for advisors that suit a range of investment exposures and strategies, including seeking a measure of downside protection within major indices.

For more news, information and strategy, visit the Retirement Income Channel.

Comments are closed.