How can you make the most of your retirement savings plan from your employer, even if you happen to be self-employed? One of the most powerful tools is the salary deferral contribution that allows you to maximize your earnings and skyrocket a retirement savings account through the power of compound earnings. 

Salary deferral contributions are a powerful benefit that can be used in tandem with other offers from your employer such as matching. 

If you have been on the fence about salary deferral contributions, here are a few reasons why you may want to stop hesitating and start leveraging it to grow your retirement savings account! 

What Are Salary Deferral Contributions?

When your employer offers a retirement savings plan, you will have the option to contribute a portion of your paycheck to that account. Redirecting this chunk of your pay to contribute to your retirement savings is called a salary deferral contribution. Although it lowers your take-home pay, you’re essentially tucking those funds into a separate account for the future.

You are not required to opt into salary deferral contributions, even if the employer offers it. You can elect to either make the contribution or forgo this benefit offered by your employer (even if you are the employer). 

That said, salary deferral contributions offer powerful benefits that help you make the most of your income and plan for the future. By deferring a portion of your salary into the retirement account, you will contribute pre-tax dollars so that your money grows until it is withdrawn in retirement. 

Keep in mind that there are limits to any salary deferral contributions that you make, defined by the IRS based on the type of account.

Types of Salary Deferral Contribution Plans

Not all salary deferral contribution plans are created equal. There are many offerings that may be available to you as a self-employed individual or a small business owner. 

Here are a few of the options that permit salary deferral contributions:

• 401(k): This is one of the most common and well-known salary deferral contribution plans available. You can elect to defer up to $23,000 of your salary to a 401(k) plan in 2024. This limit is adjusted each year for the cost of living changes.
• Solo(k): A Solo(k) functions the same as a 401(k), but it’s specifically designed as a retirement plan for self-employed individuals. The individual contribution for this account is the same ($23,000 for 2024), but you can also contribute as an employer–up to 25% of the total income or total wages of all employees. For 2024, the plan’s total contribution limit is $69,000 if you’re under 50 and $76,500 if you are 50 or older.
• 403(b) or 457(b): Depending on where you work, you might instead be offered a 403(b) or 457(b). Both feature catch-up contributions with the opportunity for employers to elect to match the funds that you contribute to this account. They will have similar contribution and deferral limits when compared to the 401(k) or Solo(k).
• SIMPLE IRA: Set aside a certain percentage of your income tax-free in the here and now, to be taxed upon withdrawal in retirement when you will be in a lower tax bracket. SIMPLE IRAs are a great option for small businesses that do not have the capacity to set up complicated retirement savings plans for their employees. However, the contribution limits are lower, at just $16,000 for 2024.

Benefits of Salary Deferral Contributions

Regardless of the type of retirement savings account you have from the list above, you can take advantage of the many benefits of salary deferral contributions. 

While you can also make Roth contributions, it’s likely that most of your contributions will be made pre-tax and lower your taxable income. These funds will grow tax-deferred until you withdraw them in your golden years. At this point, you may be in a lower tax bracket and can take advantage of the lower tax rate compared to your current tax bracket as a working individual. 

It’s also fairly common for employers to offer matching contributions on these salary deferral contributions. This can maximize your retirement savings, so make sure to take advantage of the full match from an employer while you are working (even if you only employ yourself).

Tips for Maximizing Salary Deferral Contributions

How can you maximize the salary deferral contributions that you are permitted with a compliant retirement savings plan? 

• Start early so that compound earnings have every opportunity to start stacking up.
• Contribute what you can afford, increasing your contributions as you are able to (for example, when you get a raise or slash your living expenses).
• Take advantage of employer-matching contributions if it’s offered. A 3% match means that you should be contributing at least 3% of your salary into your retirement plan – because your employer will also contribute 3% of your salary, too. The contribution from your employer is essentially free money for your account.

For those who work for themselves and have a Solo(k), you can grow your account as both the employer and the employee: an employee deferral contribution and an employer profit-sharing contribution.

The employee deferral limit is $23,000 for 2024. As the employer, your profit-sharing contribution can be up to 25% of your compensation or net self-employment income. Between the two, you can contribute up to $69,000 annually, plus a catch-up contribution of $7,500 for those who are 50 or older.

Make the Most of Your Retirement Savings Plan

Contributing to a 401(k) is typically as simple as adjusting a setting through your company’s payroll software. Self-employed individuals, however, often delay retirement contributions since they must go through the hassle of setting up a Solo(k) first. 

Making the most of your paycheck and securing your future in retirement is crucial for everyone, whether you’re working for yourself or someone else. Busy self-employed individuals don’t have to be left out of the benefits of retirement savings plans just because they work on their own. 

With Retire4one, you can set up a Solo(k) in just 3 to 5 minutes without ever leaving our website. Access large plan benefits even as a self-employed individual, choose from a wide variety of investment options, and monitor accounts your way – we make it easy! 

Are you ready to leap into retirement savings? Contact Retire4one with any questions or jump right in and get started now!