A self-employed retirement plan is a tax-deferred retirement savings program for self-employed individuals. In the past, the term “Keogh plan” or “H.R. 10 plan” was used to distinguish a retirement plan established by a self-employed individual from a plan established by a corporation or other entity. However, self-employed retirement plans are now generally referred to by the name that is used for the particular type of plan, such as SEP IRA, SIMPLE IRA, SIMPLE 401(k), or self-employed 401(k) (also known as a solo 401(k) or an individual 401(k)).

Self-employed plans can be established by any individual who is self-employed on a part-time or full-time basis, as well as by sole proprietorships and partnerships (who are considered “employees” for the purpose of participating in these plans).

Unlike IRAs, which limit tax-deductible contributions to $7,000 per year in 2024 (up from $6,500 in 2023), self-employed plans allow you to save as much as $69,000 of your net self-employment income in 2024 (up from $66,000 in 2023), depending on the type of self-employed plan you adopt.

Contributions to a self-employed plan may be tax deductible up to certain limits. These contributions, along with any gains made on the plan investments, will accumulate tax deferred until you withdraw them.

Withdrawal rules generally mirror those of other qualified retirement plans. Distributions are taxed as ordinary income and may be subject to 10% federal tax penalty if taken prior to age 59½, unless an exception applies. (Special rules apply to Roth accounts and SIMPLE IRAs.) Self-employed plans can typically be rolled over to another qualified retirement plan or to an IRA. Annual minimum distributions are required after the age of 73, for individuals who reach age 72 after December 31, 2022. If you attained age 72 in 2022 or earlier, you are already required to take annual RMDs. The RMD age will rise to 75 in 2033.  

You can open a self-employed plan account through banks, brokerage houses, insurance companies, mutual fund companies, and credit unions. Although the federal government sets no minimum opening balance, most institutions set their own, usually between $250 and $1,000.

The deadlines for setting up a self-employed plan and for making contributions vary by plan type. 

Each tax year, you may be required to fill out Form 5500, depending on the type of plan you choose. You may need the assistance of an accountant or tax advisor, incurring extra costs.

If you earn self-employment income, a self-employed plan could be a valuable addition to your retirement strategy. And the potential payoff — a comfortable retirement — may far outweigh any extra costs or paperwork.

When selecting ways to invest your cash reserve, you should balance your liquidity needs with potential returns. Short-term investment instruments, such as Treasury bills, certificates of deposit, and money market mutual funds, can provide you with the liquidity needed to meet expected and unexpected expenses and to increase your short-term investment income.

By actively managing your short-term reserves, you can provide a means of saving for the future. You can use this money to increase your net worth with little or no additional risk to your principal. It’s important to remember that because income and personal circumstances are subject to change, you should conduct a periodic review of your cash reserve and its structure.

Note: Treasury bills are backed by the full faith and credit of the U.S. government as to the timely payment of principal and interest.

Note: Bank CDs are insured by the FDIC for up to $250,000 per depositor, per federally insured institution.

Money market funds are neither insured nor guaranteed by the Federal Deposit Insurance Corporation or any other government agency. Although money market funds seek to preserve the value of your investment at $1 per share, it is possible to lose money by investing in a money market fund.

Mutual funds are sold by prospectus. Please consider the investment objectives, risks, charges, and expenses carefully before investing. The prospectus, which contains this and other information about the investment company, can be obtained from your financial professional. Be sure to read the prospectus carefully before deciding whether to invest.