Retirement Tips For the Self Employed

A large number of self employed business owners, find it very hard to start a retirement plan. They are many times at a loss, about what type of retirement plan would be suited for them and their small business. As a self employed individual, you may either choose to open a solo 401k plan, or else a Simplified Employee Pension.

If you want to go for the simplest option, then you should aim towards opening a SEP. This plan is available very easily from most mutual companies or brokerage institutions. As for investment choices, these are normally comparable to the IRAs.

In comparison however, you may be able to contribute more money into a solo 401k plan since SEPs allow you to save up to a maximum of 20% of your business income. To clarify, this is calculated as being business income, less half of the tax of self employment. The figure rounds up to about $45,000. In 401k plans on the other hand, you can save $15,500 and another 20% of the business income as defined above. In addition to this, you may also make catch-up contributions of up to $5000, if you are aged 50 or over.

Now since the $15,500 mentioned above is not calculated as part of the income savings, this means that you will be able to save a higher percentage all in all into a 401k plan. If you already have a regular 401k plan with an employer, and have some freelance earnings, then the contributions made into the solo 401k plan, will be reduced by the contributions made into the regular 401k plan you already have. This however does not affect the 20% business income, so you are still ahead of a SEP.

The only issue is that solo 401k plans are not available from many investment firms, and the fees will very considerably from one to the other. You just need to choose what you want; whether it’s simplicity, or a plan that will allow you to save a significant amount of money.

Reference: http://www.kiplinger.com/columns/ask/archive/2007/q0801.htm