SAVING FOR RETIREMENT


Do-It-Yourself Retirement Plans

When you work for a company with a retirement plan, setting aside money for retirement is easy. You do a little paperwork and decide how much of your salary you can afford to defer each pay period. But when you're on your own, setting up a plan can be daunting. Besides having to choose among a growing menu of options for self-employed workers, you have to educate yourself about the rules and deal with all the administrative hassles.

SEE ALSO: Are You Saving Enough for Retirement?

To help you pick the right plan, here's a rundown of retirement plans designed for the self-employed or owners of small firms. Contributions for all the plans are tax-deductible and earnings are tax-deferred. You'll pay taxes and, usually, a 10% penalty on early withdrawals.

Solo 401(k)

Best for: A sole proprietor who wants to maximize contributions to a tax-deferred retirement plan. Limited to owner-only businesses, so it's not the best plan for small businesses with expansion plans.

Before changes to the tax law took effect in January 2002, the costs and paperwork associated with a 401(k) made it unwieldy for an owner-only business, and you could contribute only up to 15% of your compensation.

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With the "individual(k)," a sole proprietor can make salary deferrals up to $17,500 and contribute up to an additional 25% of net earnings from self-employment -- for a maximum contribution of $51,000 in 2013. There's also a $5,500 catch-up contribution for those age 50 and older. Contributions are tax-deferred and tax-deductible. And you can take loans from your account just as you can with a traditional 401(k).

"It's a 401(k) that has been stripped of its complexities," says David Bergmann, a financial planner in Marina del Rey, Cal.

The 401khelpcenter.com has a list of financial firmsproviding 401(k)s for sole proprietors.

You must establish your plan by December 31 and fund it by April 15. For a general idea of how much of a contribution you could make based on your compensation, use this calculator for a more precise amount.

Simplified Employee Pension (SEP)

Best for: High-income business owners who want to maximize contributions through an uncomplicated plan with low fees. SEPs also work well for small-business owners with mostly low-paid, high-turnover employees, because there's no vesting structure and less incentive for employees to stay long-term.

With a simplified employee pension, or SEP, you can contribute up to 25% of your net earnings from self-employment (which is income minus half of your self-employment tax), up to a maximum of $51,000 for 2013. You can set up a SEP plan for a year as late as the due date (including extensions) of your income tax return for that year.

You can open and fund a SEP up until your tax filing deadline through a bank, brokerage or mutual fund company. It's easy to set up, and fees are relatively low (less than $100). With the exception of the higher contribution limits, SEPs work a lot like traditional IRAs.

If you have employees, too, you make all the contributions. You must pony up the same percentage of compensation for your employees as for yourself, If you have lower paid employees, you can maximize contributions for yourself and minimize the cost of contributions for employees.

SIMPLE IRA

Best for: Someone with self-employment income -- particularly from consulting or freelance work -- of $30,000 or less. There's no percentage-of-income limit, but actual dollar limits are much lower than for other plans.

A savings incentive match plan, or SIMPLE, allows you to defer up to $12,000 (or 100% of income, whichever is less) a year, and either a 2% of income fixed contribution or a 3% matching contribution.. For those age 50 and older, there is a $2,500 catch-up contribution.

If you earn $30,000, for example, you can contribute up to $12,900 a year if you take advantage of the 3% matching contribution. At that salary, the most you could set aside with a SEP would be $7,500.

Firms with fewer than 100 employees can also use a SIMPLE. If you have employees, you must include them in your plan and match their contributions dollar for dollar up to 3% of compensation or contribute 2% of every employees' salary -- even for those who don't kick in money themselves.

You must open a SIMPLE by October 1 the year you make the contribution to get the deduction. Plans are offered by banks, brokerage firms and mutual funds.

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