A Comparison of Retirement Plans for the Self-Employed
Being self-employed can be very liberating, both personally and financially. When you are self-employed, you are solely responsible for your income and your financial future. You are also responsible for your retirement, so it makes sense to compare the various retirement plans available to self-employed individuals. From SEP and SIMPLE IRAs to Keogh plans and solo 401(k) plans, self-employed individuals have access to a number of excellent retirement programs.
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SEP IRA
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A SEP IRA is one of the simplest plans for self-employed individuals, and it is a good choice for self-employed businesspeople that have no employees other than themselves. A SEP IRA does not require any special reporting, and it does not have to be registered with the IRS as a solo 401(k) plan does. You can open a SEP IRA at many mutual fund companies and brokerage firms, as well as at many banks and credit unions. For 2010, self-employed individuals can contribute up to 25 percent of their compensation, or $49,000, whichever is less, to a SEP IRA plans.
SIMPLE IRA
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A SIMPLE IRA is designed for small businesses with 100 or fewer employees. Setting up a Simple IRA is a relatively simple process, and it can be done through a bank, brokerage firm or mutual fund company. Employers have a choice of matching up to 3 percent of each worker's salary to the plan, up to an annual limit of $11,500 for 2010, or contributing up to 2 percent of each worker's salary, up to a limit of $4,900. Employees can contribute up to $11,500, or $14,000 if they are 50 or older. The SIMPLE IRA is also available to self-employed individuals, but in most cases, a SEP-IRA or solo 401(k) is a better option.
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Solo 401(k)
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A solo 401(k) is similar to a traditional 401(k), but it is designed specifically for self-employed individuals. The combined contributions for the employer and employee cannot exceed $49,000 for those 49 and younger, or $54,500 for those 50 and older. These limits are for the 2010 tax year, and the IRS adjusts them each year based on factors like inflation, so always check with your accountant before making your contribution for the year.
Keogh
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A Keogh plan allows you to shelter a significant portion of your self-employment income from taxes. You can use a Keogh plan if you work for yourself full time, or if you have part-time self-employment income in addition to a full time job. You can choose to invest up to 20 percent of your self-employment earnings into a Keogh plan, but if you do so, you must contribute the same percentage each year. If you vary the percentage, you face tax penalties for doing so.
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