retirement

Do-It-Yourself Retirement Plans

Here's a rundown of three plans for the self-employed and small-business owner.

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.

 

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.

With the "individual(k)," a sole proprietor can make salary deferrals up to $18,000 and contribute up to an additional 20% of net self-employment income -- for a maximum contribution of $53,000 in 2015. There's also a $6,000 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).

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 20% of your net earnings from self-employment (which is income minus half of your self-employment tax), up to a maximum of $53,000 for 2015. 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 $12,500 (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 $3,000 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.

Most Popular

5 Beaten-Down Stocks to Buy on the Dip
stocks to buy

5 Beaten-Down Stocks to Buy on the Dip

The market has delivered some nauseating volatility of late. The good news? That has teed up a few great stocks to buy at a discount.
September 27, 2021
10 Best Stocks for Rising Interest Rates
stocks

10 Best Stocks for Rising Interest Rates

The 10-year Treasury yield is hovering near its highest level in months. Here are 10 of the best stocks to buy in a rising interest-rate environment.
September 30, 2021
13 States That Tax Social Security Benefits
social security

13 States That Tax Social Security Benefits

You may have dreamed of a tax-free retirement, but if you live in these 13 states, your Social Security benefits are subject to a state tax. That's on…
October 4, 2021

Recommended

6 Things You Can Do Right Now to Ensure Your Money Will Last in Retirement
retirement planning

6 Things You Can Do Right Now to Ensure Your Money Will Last in Retirement

Your retirement plan needs to take a holistic approach. Because there are so many decisions to make, it’s easy to get lost in the weeds. Follow these …
October 15, 2021
10 Least Tax-Friendly States for Retirees
retirement

10 Least Tax-Friendly States for Retirees

When it comes to state and local taxes, retirees in these states are likely to pay more than retirees in other states.
October 14, 2021
Taxes in Retirement: How All 50 States Tax Retirees
Tax Breaks

Taxes in Retirement: How All 50 States Tax Retirees

We rated every state, plus Washington, D.C., on how retirees are taxed. We considered taxes on Social Security and other retirement income, tax exempt…
October 14, 2021
Social Security Earnings Tests: 5 Things You Must Know
social security

Social Security Earnings Tests: 5 Things You Must Know

If you’re still working and claim Social Security early, your benefits could be reduced, at least temporarily.
October 13, 2021