How to Save for Retirement if Self Employed

If you're self-employed, you may wonder what your options are for saving for retirement. The good news is that you have a lot of options to choose from. Some of them are even very similar to plans offered by large employers.

Instructions

1. Establish a SEP IRA. This stands for Simplified Employee Pension. Any self-employed person can open a SEP IRA. Like a 401k account, contributions are tax deductible for either your business or you as an individual. These funds go into a traditional IRA which is held in the business name. The SEP IRA is not taxable until withdrawal. What is great about a SEP IRA for retirement saving is that the contribution limit is much higher than for a traditional or Roth IRA. In 2011, for example, you can contribute up to $49,000 or 25 percent of your income (20 percent of net earning for self-employed individuals), whichever is less. You may not borrow against your savings while enrolled in a SEP IRA.

2. Set up a SIMPLE IRA, if you have employees. This stands for Savings Incentive Match Plan for Employees. You will have to make a contribution on your employees' behalf, even if the employee doesn't contribute on his or her own. Much like traditional IRAs, your contributions are not taxed until withdrawn in retirement. A SIMPLE IRA is less expensive than the other options and much easier to implement and administer. The amount you and your employees contribute cannot exceed $11,500 for 2011. You must match that contribution up to 3 percent of the employee's (and your) income.

3. Establish a Solo 401(k). The solo 401(k) is a way to save for retirement for the self-employed that is almost exactly like a traditional 401(k) plan you would have with an employer. This, however, is strictly for sole proprietors who have no employees. Your money is taxed as you withdraw it, so it goes into the retirement account pre-tax. You may borrow against your savings with a solo 401(k). As of 2011, the maximum contribution is $16,500 or 100 percent of your earned income, whichever is less, but as an employer, you can then match your contribution up to 25 percent of your earned income as defined by the IRS.

4. Set up a Solo Roth 401(k). This is just like the solo 401(k), except that your money goes into the account after taxes but grows tax-free and is not taxed at withdrawal. This is great if you believe you'll be in a higher tax bracket when you retire, in which case you may want to consider the Roth 401(k) as an option to save for retirement.

Tips & Warnings

• If you're self employed, dealing with your retirement plan in addition to everything you have to do for your business can be a daunting task. Find a CPA or accountant to help you with your financial work and taxes.

• IRS rules for setting up these plans can be very complicated. You should consult with a tax or finance professional to ensure you don't incur any tax penalties.

References

• IRS.gov: Publication 590
• IRS.gov: Retirement Topics: SIMPLE IRA Contribution Limits
• IRS.gov: One-Participant 401(k) Plans