Many people use retirement plans that are provided by their employers, but how do you plan for retirement when you are self-employed? There are several retirement plans that are geared for the self-employed or small business owner, and often they allow you to tuck away more tax-deferred cash for retirement.
Simplified employee pension retirement accounts are designed specifically to appeal to small businesses. SEP IRA’s are much easier to create and administer than a cumbersome 401(K) plan, and the self-employed can contribute up to 20% of their business income annually (25% if their business is incorporated). The annual contribution is capped at $49,000 for 2009/2010, much more than the $16,500 annual contribution limit for a 401(K). You can open a SEP IRA at just about any brokerage firm, and have plenty of investment options available to you.
The self-employed or small business owner may also contribute to a Roth IRA. With a Roth IRA , you don’t receive the tax savings for your contribution, but the money grows tax free once it is in the plan, so when you take the money out in retirement, you don’t owe any federal income taxes. It functions the exact opposite of a traditional IRA, which provides you with an income tax deduction for your contribution, but then taxes the money when distributed. The income limitations can be restrictive for a Roth IRA, as if you are married and making over $167,000, your ability to contribute to a Roth is reduced and then completely phased out once your income is above $177,000.
A solo 401(k) provides opportunities for large retirement plan contributions, but are not widely used by small businesses and the self-employed as they are the relative newcomer to retirement plans. A solo 401(k) plan can be created by those who are self-employed, such as consultants, but you must not have any employees besides yourself and a spouse. If you meet the criteria, this retirement plan allows you to make a contribution of $16,500 (2009/2010 limit) or $22,000 if age 50 or older, of your self-employment income each year. In addition, you may make a profit sharing contribution to your plan, bringing the maximum contribution up to $49,000 for the year.
Retirement planning is an important aspect of comprehensive estate planning; that is, planning to manage your assets in your later years as well as planning to distribute the assets after your death. An estate planning attorney can advise you how to coordinate all your plans to meet your financial and personal goals.