Access to a variety of tax-advantaged retirement plan choices is one of the key perks of self-employment. There are several good options that are easy to set up and cheap to maintain, including the SIMPLE IRA, Simplified Employee Pension IRA (SEP-IRA) and Solo 401(k). These plans all offer tax-deductible contributions. And money inside the plans grows tax-free until you take it out. Three keys to finding the right one:
- Retirement plan choices for the self-employed all have key differences, so you need to investigate carefully which one is right for you.
- The most significant differences are: how much money you can put in and what happens if you add staff later on.
- According to the American Institute of Certified Public Accountants (AICPA), you can't fully fund more than one in a single year, so you need to make a wise choice.
Fly solo with a 401 (k)The Solo 401(k) is great if your business is raking it in and you need to catch up on retirement savings. A generous contribution formula lets you sock away a larger portion of earnings at a lower income level than with other plans. You can also borrow against a Solo 401(k) -- handy if you fear locking up your money long term.
401 (k) Plans for Small Business. The 401 (k) Help Center is a terrific place to discover plan details and download a Directory of 401 (k) plan providers. See how much you can contribute to a Solo 401 (k) with a contribution calculator. Do it all online with The Online 401 (k) for small business.
SEP-IRAs work for one-person showsThe SEP-IRA is great if you run a one-person show and intend to keep it that way. Open one at virtually any bank, mutual fund company or brokerage firm. The contribution limit is 25 percent of net income up to $44,000 (adjusted periodically for inflation). If you hire help later, however, funding rules can make this plan costly, and loans are not allowed.
how a SEP plan works and how to establish a SEP.
Get sophisticated pension power with a SIMPLE IRAThe SIMPLE IRA is good for entrepreneurs who aspire to run bigger businesses.
how a SIMPLE IRA works and how to establish a SIMPLE IRA.
See side-by-side comparisonsPlan features are different, and confusing. See how they stack up.
Choosing a Retirement Plan Solution for your Small Business (PDF) has handy side-by-side comparison charts that can help you choose the best plan for your needs.
- As a supplement to a SIMPLE plan, consider adding a Roth IRA. While the Roth isn't really a business owner plan, it's a great option if you have more savings available after fully funding a SEP, Solo 401(k) or Simple IRA. You can put the maximum $4,000 into a Roth ($5,000 if 50+) if your adjusted gross income is under $110,000 ($160,000 for married couple). You get no tax deduction for the contribution, but money grows tax-free and withdrawals are tax-free in retirement.
- If your business is really booming and you want to set aside even bigger dollars, consider a profit sharing plan. This option is more complex and it's a good idea to talk with a CPA or other retirement plan expert about setting it up.
- One drawback of the SIMPLE IRA is a low contribution limit. You can stash away no more than $10,000 per year ($12,500 if you are 50 are older), which might be too little.