Smart Retirement Plans for the Self Employed

Those who are self-employed have a few good plans for retirement, including the SEP, Keogh plans, and Solo 401k. And to be honest, depending on which option you choose, some of the perks can leave you in a better position for retirement than those who work for corporations. Below is a brief look at the pros and cons of each.

SEPs are considered a great option for the self-employed because they allow you to contribute and deduct up to 20 percent of your income – and 25 percent of it if you are considered to be an employee in your own corporation. These individual retirement accounts allow you to adjust the percentage of money you contribute each year based on how much money you make. And since your money may fluctuate significantly from year to year, this leaves you with a lot of control. Also, while a wage earner’s maximum contribution amount per year for a traditional IRA is $5,000, the SEP allows up to $46,000. However, $230,000 is your maximum compensation allowed, which can severely inhibit those who want their businesses to grow. It is easy to open and can be done through an online brokerage firm, local bank, insurance agency, or mutual fund company.

Keogh Plans are very similar to corporate retirement plans in that if you are a sole proprietor or in a partnership, you must open one before the end of your first tax year. Also similar to the corporate plan are the penalties you may suffer for early withdrawals, and now you’re handed paperwork that would have been handled by your employer. But the benefit to one of these plans is that you can roll over all or part of your distribution into a traditional IRA. And you get to contribute up to $46,000/year as with the SEP, though you don’t get the same flexibility. In fact, once you set a contribution you are stuck with it. So if you’re thinking of going with a Keogh Plan, it should be because your SEP doesn’t fulfill your business or retirement goals.

Solo 401ks are not as well known as some of the other retirement options available, but it is a good choice for those who work as freelancers, contractors, or others with inconsistent incomes. Now if you’re making decent money and want to save a decent amount, this plan allows you to contribute up to 100 percent of your first $15,500 – and even more ($20,500) if you’re 50 or over. Even more, you can contribute and deduct in an additional 20 percent of your self-employment income. As for maximums, you can contribute up to $46,000 per year ($51,000 for 50 or older) if your income allows it, but if you’re having a bad year you have the option of contributing zero. Like a standard 401k, a Solo will allow you to take out a penalty- and tax-free loan. To set up a Solo 401k, you’ll need to contact a brokerage or bank.

If you’re looking for a few other options in self-employment, you can try the Roth IRA, which doesn’t allow you to contribute nearly as much, but when you’re ready to make an eligible withdrawal, you can do so tax-free. And if you’re married, you can try the spousal deductible plan that allows you to contribute if your spouse belongs to a retirement plan.


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