Retirement Tips

Retirement Investing - Which Self-Employed Retirement Plan Is Best For You

November 10th, 2006 by Papabear

When you’re self-employed, choosing the right retirement plan for yourself can be a real pain in the neck. You want to choose the retirement investing plan that brings you the best benefits with the least costs, both financial and in paperwork.

People with small or significantly variable self-employment earnings may be better off looking at retirement investment plans that also allow them the flexibility of whether or not to make a contribution at any given time.

For self-employed people in that situation, the best choices include SEPs and self-employed 401(k) plans.

A SEP (Simplified Employee Pension) lets you contribute up to 20% of your self-employment income (and that percentage increases to 25% of your salary if you’re an employee of your own corporation), up to a current maximum of $44,000 a year.

If you have employees, you can still have a SEP, and you can set up a SEP any time up to the time you file your taxes. In addition, you can vary the amount of contribution as needed since you are not locked into a specific contribution amount or percentage. This obviously can be a big plus if your income fluctuates

However, if you make a contribution for yourself, you have to make it for all your employees. Also, be aware that you can’t take out loans against your SEP.

On the other hand, a self-employed 401(k) plan - also called a solo and individual 401(k) - does allow loans to be taken out against it. Indeed, you can transfer your IRAs, regular 401(k), or any other pretax-retirement funds, whatever the amount, to your self-employed 401(k) account and then borrow from it.

However, self-employed 401(k) plans are only available if you have no employees, although they can be used for multiple owners, as well as for spouses who are employees.

Like the SEP, a self-employed 401(k) plan also allows annual contributions of up to $44,000. (By the way, maximum contributions for both SEP’s and self-employed 401(k)s can be affected by whether or not you participate in any other retirement plan. Check with your retirement investment planner or tax advisor before making your decision.)

401(k) plan