If you’re a freelancer, an independent contractor, a sole proprietor, an independent consultant, or self-employed in any other way, saving for retirement plans can be a challenge. Since you don’t have an employer to motivate you, or match any personal contributions you make to a company-sponsored retirement savings plan, you’ll need to step up to the plate and do it all yourself. Fortunately, if you have the will (and the money to save), there is a way.
Here are some of the more popular retirement savings plans available to you, and the issues to consider when deciding which one to establish.
Simplified Employee Pension (SEP) • This plan is also commonly called a SEP-IRA. And just like the name implies, it is relatively easy to establish and maintain. Because of its high contribution limits, it is quite popular among, and most appropriate for, business owners with no employees.
- You can contribute as much as 25% of your net earnings from self-employment, up to a maximum of $50,000 for 2012 and $51,000 for 2013.
- SEPs can be set up for a plan year until the due date of your tax return (including extensions) for that year. In other words, you have until April 15, 2013 (or later if you’ve filed for an extension) to set up and contribute to a SEP for 2012.
- The cost to establish and maintain a SEP is low.
- Most banks, investment firms, and some insurance companies can set one up for you in just a few minutes. Alternatively, you can establish one yourself using IRS Form 5305-SEP and making a SEP-IRA contribution through a financial institution of your choice.
- If you have employees, you must make contributions on their behalf as well.
Read Related: The Advantages of Being a Microentrepreneur
Solo 401(k) • This plan is sometimes called an Individual 401(k), and is a favorite among successful business owners with no employees other than a spouse. It’s a bit more costly to set up and maintain than some other plans, but the potential for tax breaks and a full array of features more than make up for it.
- As an employee of your own company, you can contribute up to $17,500 in 2013 (plus an additional $5,500 if you are age 50 or older).
- As an employer, you can contribute up to an additional 25% of your net earnings from self-employment not to exceed $51,000 for 2013.
- This plan can be set up to allow for features found in many larger, corporate sponsored retirement plans—such as loans, hardship distributions, and Roth contributions.
- Each year contributions are discretionary. They can be increased, decreased, or skipped entirely if you choose to do so.
- You cannot set up a Solo 401(k) if you have employees other than a spouse.
- The plan must be established by December 31 of the year in which you would like to receive the tax deduction, but you have until the following April 15 (or extended deadline) to make the contribution.
Savings Incentive Match Plan for Employees (Simple IRA) • The SIMPLE IRA was designed specifically for self-employed individuals and small business owners. It’s probably your best bet if you have only a few employees making more than $5,000 a year and you are willing to share a little bit of your business earnings with them.
- You can contribute all of your net earnings from self-employment up to $12,000 in 2013 (plus an additional $2,500 if you are age 50 or older) as a salary reduction. Your employees can do the same with their earnings.
- As an employer, you may be required to contribute as much as 3% of your eligible employees’ earnings into their accounts every year.
- Most banks, investment firms, and some insurance companies can set one up for you in just a few minutes. Alternatively, you can establish one yourself using IRS Form 5304-SIMPLE or Form 5305-SIMPLE and making a SIMPLE-IRA contribution through a financial institution of your choice.
- The plan must be set up between January 1 and October 1, unless you became self-employed after October 1 (in that case, as soon as administratively feasible).
Other Plans • Various other plans, such as the traditional profit-sharing, money purchase, and defined benefit (pension) plans are possible options, but due to changes in tax laws and the evolution of newer and more user friendly plans, for the most part, they have gone by the wayside. However, if none of the above discussed plans meet your needs, they may be worth exploring.
This information is just a summary of what you need to know. So before adopting any retirement plan, you should consult with a tax advisor or financial professional for assistance with evaluating and choosing the best retirement plan for your unique situation.
