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Retired Military Finances 201: Self-Employed Retirement Plan Options

Retirement Funding

As a retired military officer, you have the benefit of an inflation adjusted pension. It literally is worth more than one million bucks. That doesn't mean it is sufficient for the lifestyle you desire for your ultimate retirement. The good news is, if you're self-employed, you have lots of different options to save for your retirement.

Below we explore six types of accounts you can open to start saving for your ultimate retirement.

1. Traditional and Roth IRAs

A traditional or Roth IRA is a common choice and is suitable for individuals who are saving less than or up to $6,00 a year ($7,000 if age 50 or older).1 There are advantages to both – you will have tax deductions on a traditional IRA that you won’t have to worry about after retirement. With a Roth, there is no immediate deduction and withdrawals, after you retire, are tax-free. Also, IRA contributions do not affect the amount of Qualified Business Income (QBI) that you can deduct. That isn't necessarily the case with the other retirement plans.

2. SEP IRA

A Simplified Employee Pension (SEP) IRA works for those who are self-employed with few or no employees. The contributions for this in 2020 is up to 25 percent of compensation, or $57,000, whichever is less. There is a $285,000 limit on compensation for 2020 ($280,000 for 2019). Employers must contribute an equal percentage of salary for each employee, and you will also be counted as an employee.2

3. Solo 401(k)

The solo, or one-participant 401(k) plan is a traditional 401(k) that is for self-employed individuals who do not have employees.You can designate your first $19,500 ($26,000 if age 50 or older) of net income as "wages" that can be contributed to the 401(k). Beyond that you can contribute 20% of net income until reaching the annual limit ($57,000 in 2020).

4. Defined Benefit Plan

This plan is a fitting choice for self-employed individuals who are looking to put away more each year than your typical allowed contributions. For 2020, the maximum contribution is $230,000.3 The contribution will be based on how much you will be receiving once you retire, your age and the expected return on your investments. Contributions are tax-deductible in most cases, and the distributions during retirement will be taxed as income. While this is an option, as a retired military officer, you'll want to include a lump-sum payout option in the plan as you may not want another stream of income in retirement. A lump sum may be more appropriate.

5. Simple IRA

The Simple IRA (Savings Incentive Match Plan for Employees) is ideal for business owners who have 100 or fewer employees. For 2020, you can contribute up to $13,500, with a catch-up contribution of $3,000 if you are age 50 or older. If contributing to another plan, your contributions cannot exceed $19,500. The contributions are deductible, but any distributions during retirement are taxed. Any contributions you make to an employee account is also deductible as a business expense.4

6. Self-Directed IRA

A self-directed IRA (SDIRA) maintains the same eligibility and contribution limits as a traditional IRA. However, an SDIRA enables account holders to invest in alternative assets, such as precious metals, cryptocurrency and real estate. With a self-directed IRA, you are the primary manager of your account, so you choose exactly where to allocate funds. However, with many unique investments available it’s essential that holders understand the regulations, knowledge and time commitment involved in their investments.

Being self-employed certainly has its perks, but it also oftentimes means making big decisions for your future on your own. Before deciding which self-employed retirement plan option to commit to step back and ask yourself what will work best for your unique situation, ideal future and risk tolerance.


If you found this article useful, you might like the following blog posts:

Retired Military Finances: Selling a Business? 3 Common Valuation Methods to Determine Worth


How Retired Military Officers Can Set Up Their Small Business So They Can Take a Vacation


6 Estate Planning Tips for Retired Military Business Owners


  1. https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-ira-contribution-limits
  2. https://www.irs.gov/retirement-plans/operating-a-sep
  3. https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-defined-benefit-plan-benefit-limits
  4. https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-simple-ira-contribution-limits

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