How to Choose a Retirement Plan if You're Self Employed

Open a Roth IRA account? Do I still qualify for a 401(k)? How do I make retirement investments if I'm self employed? Stuff the money in a mattress? These are all questions freelancers and others that are self employed are asking. What options are available without spending big bucks on retirement planners.

Difficulty: Moderate

Instructions

1. Invest, even on a small scale. If you're only able to save a small amount, say $5,000 or less, open a Roth IRA account. The Roth IRA will allow you to save after-tax earnings that will grow tax free. They're very simple to set up without paying for retirement planners. Roth IRA rules do have limits on income: for 2009 singles must earn less than $120,000 and couples less than $176,000.
   
   Keep in mind that you can have a Roth IRA and an Individual 401(k)account to maximize your retirement investments.

2. Investigate a SEP IRA. SEP = Simplified Employee Pension. IRA = Individual Retirement Account. These accounts are usually best if you're freelancing and don't have too much income that you want to sock away but want to continue saving more than you could in a traditional IRA which currently caps annual contributions at $5,000 for 2009.
   
   The SEP IRA allows you to contribute up to 20 percent of your income earned while self-employed. You can save an additional five percent if you have a corporation and you're an employee. The maximum you can contribute for 2009 is $49,000.

3. Save more money for your retirement with an Individual 401(k). These retirement plans let you save even more than the SEP IRA. You will need to work with a brokerage firm to set this up and you'll need to do so before the end of the year in which you earned the income you want to invest.
   
   You can contribute a maximum of $49,000, the same as the SEP IRA. However, the Individual 401(k) also lets you make two additional contributions. You can contribute up to 100 percent of the first $16,500 of your income for 2009. If you're over the age of 50, that jumps to $21,500. You can also save up to another 20 percent of self-employed income. That increases to 25 percent if you're employed by your own corporation.

4. Don't double-dip. If you're freelancing and also work for an employer that has a 401(k), you're limited to the total of $16,500 combined. Take advantage of any matching dollars your company may offer first, then fund your Individual 401(k).

Tips & Warnings

• Diversify your retirement investments to protect against market fluctuations.

Resources

• Free Digital Photos