As a self-employed individual, you have a choice between several types of qualified retirement plans. Each has different contribution limits, complexity and associated costs. How much you can sock away into your own retirement plan depends on the plan you choose and the amount of your self-employment income.
With your own business as a self-employed individual, your retirement plan options are a regular IRA, an SEP-IRA or a solo 401(k). The IRA contribution limits are the same, no matter the source of your income, self-employed or from a job. For 2013, the IRA contribution limit is $5,500 with an additional $1,000 if you are age 50 or over. An IRA contribution may not be deductible if you also have a regular job with an employer-provided retirement plan. As a self-employed individual, the other retirement plan options allow you to contribute and deduct almost 10 times as much money.
An SEP-IRA is an employer-funded retirement plan, and self-employment qualifies. As a self-employed individual -- filing tax as such -- you can contribute up to 20 percent of your net income to a maximum of $51,000 for 2013. The SEP-IRA rules allow contributions of up to 25 percent of wages, but as self-employed, you must adjust net income for the self-employment tax you pay resulting in the 20 percent of net business income limit.
A self-employed individual can set up a 401(k) for as few as one -- the sole business owner and in this case called a solo 401(k). With a solo 401(k) plan the maximum salary deferral -- $17,500 in 2013 -- and the $5,500 catch-up contribution if age 50 or more can be made right off the top of net income. In addition to the elective deferrals, as self-employed you can contribute up to 25 percent of net income as profit-sharing into the plan. However, there is also an annual cap of total 401(k) contributions, which is the same $51,000 for 2013.
Choosing a Plan
Both the SEP-IRA and 401(k) plans allow you, as self-employed, to set aside up to $51,000 per year. The 401(k) choice will get you to the maximum contribution with a lower amount of business income with a trade of off higher fees to set up and manage a 401(k) plan. Another retirement plan option is a defined benefit plan, where contributions are calculated to provide a certain income at retirement. For a high-income, later-in-life person, a defined benefit plan may require very large contribution amounts to go along with the high cost of setting up and maintaining this type of plan.
- Bankrate.com: Retirement Plans for Self-Employed Workers
- Internal Revenue Service: Retirement Plans for Self-Employed People
- Internal Revenue Service: 401(k) Resource Guide - Plan Participants - Limitation on Elective Deferrals
- Internal Revenue Service: Operating a SEP
- Boulder County Business Report: Defined Benefit Plan Can Boost Retirement Savings
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