Source: https://www.linkedin.com/feed/update/urn%3Ali%3Ashare%3A7015986336427905024
Forget that $22,500 limit. Some workers can supersize their tax-deferred retirement savings up to $265,000 in 2023: If you have self-employment income, your limits are much higher than those on 401(k)s: https://lnkd.in/gzd2FnG4 :
The #IRS recently announced new maximum #retirement #contribution levels for 2023, and most people focus on the amount allowed for employee #deferrals in a #401k plan, which will be $22,500, with an additional $7,500 for those 50 and older. For traditional #IRA’s and #Roth’s, it’s $6,500 with an extra $1,000 for catch-ups.
You get to the bigger numbers when you’re in the position of being both the #employee and the #employer. For SEP IRAs or solo 401(k) plans, which are designed for those who file #ScheduleC for #selfemployment income, you can defer up to the total limit allowed for both employee and employer, which will be $66,000 for 2023. For #cash-#balance #pension plans, a type of #definedbenefitplan you can set up for yourself as a #solo #practitioner, the IRS says you can defer up to a benefit of $265,000.
The reason you can have such a high limit for cash-balance pension plans is that they are calculated by a different system than the standard 401(k). A defined-benefit plan focuses on the benefit amount, and uses #actuarial #calculations based on the participant’s #age and #income to determine what the contribution can be for the year. So an older individual making a lot of money can put away much more than a younger person making a starting salary.
#Solo #entrepreneurs who make this move usually consider it after going through several other plan options. They might start in their younger years with a plan with a lower deferral amount, and then switch when their age and income justify the higher numbers. Your earnings accumulate in an account much like a 401(k), and most users plan to roll over the funds into an IRA at retirement and manage the accounts on their own.
For these plans, you can contribute up to the $22,500 maximum amount allowed as an employee first, and then you can contribute more as the employer. For a SEP, it’s 25% of your net self-employment income up to the $66,000 maximum combined limit for 2023 (catch-up contributions do not apply to SEPs). For a solo 401(k), you can contribute all your self-employment income, up to the $66,000 maximum combined limit in 2023, plus a $7,500 catch-up contributions for 50 and older, so most times this works out to be a higher dollar amount than the SEP.
The ones who benefit most from this approach make over the income cap for the 20% #QualifiedBusinessIncome #deduction #QBI, which was implemented in 2018 as part of the Tax Cuts and Job Act. That limit was $170,050 for single filers and $340,100 for joint filers in 2022.
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