You Quit Your Job, but You Still Need a Retirement Plan

Self-employed business owners who want to save more than $6,000 a year can choose between two retirement savings accounts created for sole proprietors. For 2022, a Simplified Employee Pension plan (SEP I.R.A.) allows contributions of up to 25 percent of income or $61,000 for 2022, while a solo 401(k) allows contributions up to $20,500. With either retirement account, contributions are tax deductible and will reduce your taxable income. The only requirement for the solo 401(k) is an employer identification number, which is easy to obtain through the Internal Revenue Service.

If you’ve been contributing to an employer-sponsored retirement plan before you quit, you could leave your account where it is (and possibly pay administrative fees), or you can roll it over into an I.R.A. If you plan to find another job, you might want to wait and transfer it into your new employer’s retirement plan, assuming one is offered. You also have the option of cashing out your 401(k) but you’ll be charged a 10 percent tax penalty in addition to paying income tax on the total amount because the account was funded with pretax dollars.

Determine how much to save

Saving for retirement when you’re trying to build a new business and pay your monthly bills can be tricky.

Before you open a self-directed retirement account, Mrs. Meyer recommends, make sure there is enough income to pay monthly bills, including health insurance premiums, and save at least $1,000 in cash to pay for any unexpected expenses without using credit cards. Once those basics are covered, it’s time to save for retirement, even if it’s just a small amount of money each month.

“Psychologically, it can be challenging to tie up your money in a longer-term investment when you’re just starting a new business,” said Kristen Anderson, the chief executive and co-founder of Catch, an app that helps users save for retirement by automatically depositing a percentage of their income into an I.R.A. The idea is to recreate the experience that users are accustomed to with an employer-sponsored plan without locking them into saving a specific dollar amount each month.

When Keagan Schmidt of Hopkins, Minn., quit her job as a financial adviser in October to work for DeeperThanMoney, an online financial literacy start-up that doesn’t offer employee benefits, she and her husband, Derek, each opened a Roth I.R.A. The couple, both 27, set up their I.R.A.s to get a $500 deposit from their joint checking account at the beginning of each month. The goal is for each to save $6,000 this year.

“With no 401(k), I have resorted to maxing out my Roth I.R.A., first and foremost,” Mrs. Schmidt said.