Setting up a plan to save for retirement is important for independent contractors. If you're an independent contractor in the healthcare business, you may be wondering what type of retirement plan options are available.

It's never too soon to start saving. But you'll want to be certain to choose the type of retirement plan that will be most suitable and beneficial for your situation. Here, we offer an overview of some of the best retirement plan options for independent contractors working on their own or operating a small healthcare business employing a number of staff members.

Opening a Simplified Employee Pension Plan That Can Work for You as an Independent Contractor (SEP)

SEPs include Individual Retirement Accounts set up for businesses of any size. These flexible options are suitable for sole proprietorships or businesses with thousands of employees. They offer a solution for those who want to make contributions of greater amounts than those allowed by other types of IRAs to their own and perhaps employee accounts.

Setting up an SEP is relatively simple. The IRS provides a document that can serve as a template to help you set up an SEP plan for your small business. If you would rather have a more elaborate, personalized plan, you can create your own version. Once created, there is no need to file annually.

With an SEP:

• Contributions provided by you, as the employer, go into your SEP-IRA account, and the account of each employee if applicable. 
• Employees may not contribute to their accounts.
• There is no requirement to make a deposit every year. 
• Employees may not borrow from their accounts, but contributions are 100 percent vested immediately. 

Here are some guidelines from the IRS:

SEP plans (that are not SARSEPs) only allow employer contributions. For a self-employed individual, contributions are limited to 25% of your net earnings from self-employment (not including contributions for yourself), up to $61,000 for 2022 ($58,000 for 2021; $57,000 for 2020).

Setting up a Savings Incentive Match Plan (SIMPLE) - Suitable for an Independent Contractor 

SIMPLE plans have more specific requirements than SEP IRAs. Only independent contractors or enterprises with less than 100 employees may open one. A document is required to be filed.

You can use the IRS's prepared document or one created and offered, with IRS approval, by various financial institutions.  Key points of a SIMPLE savings incentive plan include:

• Both employer and employee can contribute to employee accounts. 
• Contributions go into employee SIMPLE IRA's 
• Employers are mandated to match employee contributions - dollar for dollar - up to 3 percent of each employee's compensation or 2 percent of each employee's compensation up to the annual limit.  
• Contributions are vested as soon as they're donated.  
• Contributions are 100% vested immediately. But employees can't borrow from their accounts. 

Could a SOLO 401(k) be the Right Choice for a Retirement Plan for a Healthcare Worker Serving as an Independent Contractor?

A SOLO 401 (k) could be a rewarding choice if you want to contribute a lot of cash quickly. The first $17,000 in earnings diverts into your plan. After that, you can contribute 25%  of your salary, up to a maximum contribution of $53,000.

Thanks to the initial salary deferral feature, you can reach the $53,000 limit with a lower income level than with an SEP IRA. You can also borrow against your contributions. The drawback is that there is a more complex administrative and paperwork requirement. 

Retirement Accounts Most Suitable for Sole Proprietor Independent Contractors

If you are the only person working for your company, or if the economics of your healthcare service doesn't support a more complex arrangement, or generous contribution amounts, a Traditional IRA or a Roth IRA may be the most appropriate type of retirement plan for your business. 

These two types of IRAs share two common traits:

There is no requirement to pay income tax on earnings. There is an early withdrawal penalty if you withdraw cash before you reach age 69.

But there is a significant difference when it comes to taxes:

Roth IRA contributions occur with after-tax dollars. Since income tax was already paid on the amounts, when you make withdrawals, you don't owe tax. You can use Traditional IRA contributions as tax deductions during each year in which you make them. Tax will be due on the number of withdrawals made during each year when you file your income tax forms. 

How to Choose the Best Retirement Plan Option as an Independent Contractor

One of the most important considerations when choosing a retirement plan is the amount of cash you will have available for annual contributions. The following is a basic guideline:

• If you are a sole proprietor or plan to contribute less than the standard $6,000 limit, a Traditional IRA or a Roth IRA could likely be your best choice.
• You can contribute a bit more, perhaps up to $14,000 per year, you might opt for a SIMPLE IRA.
• If you have the means to contribute larger amounts, up to  $61,000 per year, you could consider an SEP IRA or a SOLO 401 (k).

Note: maximum contributions to IRAs and retirement accounts may vary according to certain conditions, like your age or marital status. For example, you can contribute $7,000 a year to a Roth or Traditional IRA if you are age 50 or older. The amounts you contribute to change from year to year. 

Choosing a retirement plan can be confusing, but it's essential, especially for independent contractors in the healthcare industry. This is true whether you're a healthcare provider paid as an independent contractor or an independent contractor with a small healthcare service that employs a growing number of staff members.

In addition to creating the conditions that will enable you to enjoy your later years, setting money aside for the future via a formal retirement plan provides a significant deduction when preparing your taxes. We hope this post helps your path to a comfortable retirement. Your accountant can further assist you in making the right choice.