4 Retirement Plans For Self-Employed Workers
As a self-employed individual, you are responsible for establishing and maintaining your own retirement plan. One of the main obstacles to establishing a retirement savings plan is understanding the requirements, limits and administrative responsibilities of the different options. Some plans are more flexible, offering the ability to grow as your company grows.
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Traditional or Roth IRA
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A traditional or Roth IRA are two consumer IRAs that are established outside of the employer's realm of responsibilities. For a self-employed person, one of these two IRA accounts is a cost-effective and simple way to start a retirement savings program. You can open these IRAs at a bank, brokerage firm or specialty CPA firm with just a couple of forms. There is no restriction to opening these as long as you have earned income and meet the income limitations. As of 2010, you can contribute up to $5,000 annually. Traditional IRAs provide a tax deduction up front. Roth IRAs don't, but you can withdraw money from them tax-free in retirement.
Simplified Employee Pension
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A simplified employee pension plan is a variation on typical IRA accounts. You can set up an SEP IRA if you are the only employee or have many others. The SEP IRA only allows traditional IRA contributions. To establish a SEP IRA, you must provide benefits to all eligible employees, notify all employees and establish an IRA on behalf of each of those eligible employees. Form 5305 -SEP must be filed with the IRS. Only the employer makes contributions, which become immediately vested to the employee. The 2010 maximum contribution limit is $49,000 based on maximum of $245,000 in annual compensation.
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Solo 401k
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A solo 401k allows a single-employee company to establish a 401k plan. These plans function similarly to a larger company's 401k plan with up to $16,500 in employee elective contributions allowed annually. The employer may also contribute to the plan on behalf of the employee, as long as all contributions do not exceed $49,000 per year. This allows you to save more toward retirement while deducting some of your personal compensation and get a business deduction for employer contributions. Solo 401k plans require an adoption agreement and more complex bookkeeping but are more affordable than most traditional 401k plans.
Keogh Plan
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A Keogh plan is a defined-benefits or profit-sharing plan that provides employer contributions based on the overall company's annual performance. Keogh plans require professional set-up and administration, often making them one of the more expensive plans a self-employed person can have. If you have more than one employee, a Keogh must include all eligible employees. While the maximum contribution is $49,000, all contributions to eligible employees must not exceed 25 percent of total employee compensation, similar to an SEP IRA plan.
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