SOLVED: What's the Best Retirement Plan if I'm Self-Employed?

If you have no employees other than a spouse, you can take advantage of a powerful retirement plan known variously as an individual 401(k), a solo 401(k) or an independent 401(k). The beauty of a solo 401(k) is that you don't have to earn as much as you do with other retirement plans to qualify for the maximum tax-deductible contribution.

You can contribute up to $15,000 this year as an employee. Then, your business can kick in another 20% of your self-employment income (defined as total business income minus half of your self-employment tax) -- or 25% of your compensation if your business is incorporated -- for a combined maximum contribution of $44,000 in 2006. If you're 50 or older, you can sock away up to $49,000.

Jonathan Sargent, who runs his own motion design and animation business in Atlanta, has been using a solo 401(k) since it first debuted in 2002. He jumped at the chance to sign up for the Single(k) from Decimal, a financial-services provider. "Saving the most money possible is my A-number-one priority, and the Single(k) raised the roof," says Sargent, 38. Before that, he used a SEP IRA, which allows you to kick in only 20% of your self-employment income without the $15,000 employee-contribution sweetener.

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If your business, like Sargent's, is incorporated, you need a gross income of just $116,000 to contribute the full $44,000 this year. Owners of unincorporated businesses need to earn $153,000 to max out. With other types of retirement plans for small businesses, you would need to earn at least $176,000 in an incorporated business or $229,000 in an unincorporated business to save the full $44,000 this year.

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