Retirement planning just got more complex—and potentially more powerful—for Self-employed and self-employed professionals. Now that the final regulations from the IRS and Treasury Department on the Roth catch-up contribution rule under the SECURE 2.0 Act have been released, it’s time to take a closer look at how these changes could impact your Self-employed retirement plans.
While many of the provisions target traditional workplace retirement plans like 401(k)s, the ripple effects extend to solo 401(k)s, SIMPLE IRAs, and other plans commonly used by Self-employed. Understanding the nuances of these new rules can help you stay compliant, maximize your contributions, and make smarter decisions about after-tax versus pre-tax savings.
A Quick Refresher: The Basics of SECURE Act 2.0?
The SECURE 2.0 Act, passed in late 2022, builds on the original SECURE Act of 2019. It’s a broad piece of legislation aimed at improving retirement readiness across the U.S. workforce. For Self-employed, it introduced several opportunities and challenges, including:
- Expanded access to retirement plans
- Increased contribution limits for certain age groups
- More flexible rules around required minimum distributions (RMDs)
- Enhanced incentives for small businesses to offer retirement plans
A key provision involves catch-up contributions for workers over 50. These are extra contributions allowed for individuals aged 50 and older, designed to help them boost retirement savings as they near retirement age.
The Roth Catch-Up Rule: What’s Changing?
Under SECURE 2.0, certain higher-income individuals making catch-up contributions must now designate those contributions as Roth—meaning they’re made with after-tax dollars.
This means if you’re 50 or older and earn more than $145,000 in wages from a particular employer (indexed for inflation), any catch-up contributions to a 401(k) or similar plan must be Roth contributions. This means you pay taxes on the money now, but withdrawals in retirement are tax-free.
For Self-employed, this rule may not apply directly unless you’re operating through an S-corp or other entity that pays you W-2 wages. However, Roth-style savings are becoming a bigger part of the retirement landscape so you may wish to leverage tax planning around these contributions.
Key Considerations for Self-employed Under the Final SECURE 2.0 Regulations
The final regulations issued by the IRS and Treasury offer clarity on several fronts:
- Aggregation of Wages: If you work for multiple common law employers under the same plan, your wages can be aggregated to determine whether the Roth catch-up rule applies. This is especially relevant for Self-employed who work through multiple entities or platforms.
- Delayed Applicability: Most of the Roth catch-up provisions take effect for taxable years beginning after December 31, 2026. However, governmental plans and those under collective bargaining agreements may have a later start date.
The final regulations do not extend the administrative transition period provided under the previous guidance, which ends on December 31, 2025. That means plan sponsors and participants need to be ready for full compliance by 2026.
What This Means for Self-employed-Specific Retirement Plans
The following outlines how these changes intersect with the most common retirement plans used by Self-employed:
Solo 401(k)
Also known as an individual 401(k), this plan is ideal for Self-employed with no employees other than a spouse. It allows for both employee and employer contributions, with high annual limits—up to $66,000 in 2023, plus catch-up contributions if you’re 50 or older.
- Roth Option: Solo 401(k)s can include a Roth component, allowing Self-employed to make after-tax contributions.
- Catch-Up Contributions: If you’re over 50, you can contribute an additional $7,500 (2023 limit), and SECURE 2.0 increases this for ages 60–63 starting in 2025.
- Impact of Roth Rule: If you pay yourself W-2 wages through an S-corp and exceed the income threshold, your catch-up contributions may need to be Roth.
SIMPLE IRA
The Savings Incentive Match Plan for Employees is designed for small businesses and self-employed individuals. It’s easy to set up and has lower administrative costs than a 401(k).
- Contribution Limits: In 2023, the limit is $15,500, with a $3,500 catch-up for those 50+.
- SECURE 2.0 Enhancements: Starting in 2024, catch-up limits increase for ages 60–63, and employers can make higher contributions.
- Roth Option: SECURE 2.0 allows SIMPLE IRAs to offer Roth contributions, though implementation may vary by provider.
SEP IRA
The Simplified Employee Pension plan is popular for Self-employed with variable income. It allows for employer-only contributions—up to 25% of compensation or $66,000 in 2023.
- No Catch-Up Contributions: SEP IRAs don’t currently allow catch-up contributions, so the Roth catch-up rule doesn’t apply.
- Roth Option: SECURE 2.0 permits Roth SEP contributions, but this is new and may not be widely available yet.
- Strategic Use: Self-employed may pair a SEP with a Roth IRA to balance pre-tax and after-tax savings.
Four Action Steps to Update Your Self-employed Retirement Strategy
To stay ahead of these changes under the SECURE Act 2.0, consider the following:
- Review Your Retirement Plan
Whether you use a solo 401(k), SEP IRA, or SIMPLE IRA, make sure your plan is up to date and capable of handling Roth contributions if needed. - Consult a Tax Professional
The Roth catch-up rule adds complexity to retirement planning. A tax professional can help you navigate contribution limits, income thresholds, and compliance timelines. - Track Your Income Sources
If you receive W-2 income from multiple entities, be aware of how aggregation rules might affect your eligibility for Roth catch-up contributions. - Stay Informed
The SECURE 2.0 Act includes provisions that will continue to roll out over the next few years. Keep an eye on IRS updates and industry guidance to ensure you’re making informed decisions.
Retirement planning for Self-employed is never one-size-fits-all. A tax professional can help you understand the rules and adapt your strategy. You can turn complexity into opportunity—and build a retirement plan that works for your unique situation.
