Retirement Plans for the Self-Employed

I have had an IRA for years (since I left Kiplinger's as a full-time employee and became a contract worker). But as my husband and I estimated our tax bill for 2010, we realized we could save big on taxes if I contributed to other types of accounts, rather than limiting myself to the $5,000 contribution limit on my IRA.

But what retirement-plan options are there for self-employed people other than an IRA? Plenty. And contributions are tax deductible.

Solo 401(k)

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Maximum contribution: Up to $16,500 plus 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 maximum of $49,000.

Best for: Someone who wants to maximize contributions to a tax-deferred retirement plan and has no employees other than a spouse. If a spouse works for the company, he or she can contribute up to $49,000, too.

For a general idea of how much of a contribution you could make based on your self-employment income, use this calculator for a more precise amount. The 401khelpcenter.com has a list of financial firms now providing solo 401(k)s.

SEP IRA

Maximum contribution: Up to 20% of your net self-employment income , for a maximum of $49,000.There's no additional salary deferral, so your income must be at least $245,000 before you reach the $49,000 contribution level.

Best for: High-income business owners who want to maximize contributions through an uncomplicated plan with low fees. 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 are subject to the same rules as a regular IRA.

SIMPLE

Maximum contribution: $11,500 (or 100% of income, whichever is less) a year, plus 2% or 3% of income.

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.

If you earn $30,000, for example, you can contribute up to $12,400 a year if you take advantage of the 3% matching contribution. At that income level, the most you could set aside with a SEP IRA or Keogh (see below) would be $7,500. Plans are offered by banks, brokerage firms and mutual funds.

Keogh

Maximum contribution: 20% of self-employed income, up to a $49,000 maximum.

Best for: Small-business owners who want to provide an incentive for key employees to stay with the firm. A Keogh lets you set up a vesting schedule to encourage employees to stay with your company longer. However, Keoghs have more administrative burdens.

Award-winning journalist, speaker, family finance expert, and author of Mom and Dad, We Need to Talk.

Cameron Huddleston wrote the daily "Kip Tips" column for Kiplinger.com. She joined Kiplinger in 2001 after graduating from American University with an MA in economic journalism.