Retirement Accounts for the Self-Employed
Self-employed workers often have the same retirement needs as employees, but do not have the benefit of employer contributions to retirement plans. Self-employed workers still have options when it comes to setting up a retirement plan. Choosing the best retirement plan depends on your retirement goals. Self-employed workers have the opportunity to create retirement plans that offer the same, if not better, benefits offered by an employer.You can open a retirement account with an online broker or financial advisor at your bank.
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Simple IRA
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As a self-employed worker, you can open a Savings Incentive Match Plan for Employees (SIMPLE) IRA if you have less than 100 employees and earned at least $5,000 in compensation the previous year. If you have employees, you can choose to make matching or non-elective contributions towards their retirement accounts. Your contributions go directly to an IRA account set up for your employees and you. As of 2011, the maximum contribution amount per year is $11,500. Self-employed workers over the age of 50 may contribute an additional $2,500 a year.
Sep IRA
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Another option is to open a Simplified Employee Pension (SEP) IRA. You may contribute to a SEP IRA and maintain another retirement plan. The SEP IRA has low setup and maintenance costs. As of 2011, you may contribute 25 percent of your net compensation, up to $49,000 per year. Any self-employed person can open a SEP IRA.
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Individual 401(k)
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An individual 401(k) requires you to have no employees other than a spouse. The individual 401(k) is similar to 401(k) plans used by employers across the United States. You are able to contribute more money to an individual 401(k) than to a SIMPLE IRA or a SEP IRA at identical income levels. As of 2011, the maximum contribution amount per year is $49,000, or $54,000 if you're age 50 or older. You can set up a profit-sharing contribution up to 20 percent of business profits. This allows you to maximize your contributions made to the plan.
Defined Benefit Plan
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The Defined Benefit Plan is the most administratively complex and expensive compared to other retirement accounts for self-employed workers. This plan is most appropriate if you have a lot of money to save for retirement. You can choose a Defined Benefit Plan regardless of your business size, and you have the option of contributing to other retirement accounts while maintaining a Defined Benefit Plan. As of 2011, the maximum contribution amount per year is $195,000. The annual contribution amount is determined by an actuary using a specific formula. The IRS website explains more about this plan.
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