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Regular 401(k) plans are
normally established by for-profit companies that have "more than a few"
employees. While there is no set minimum for the number of employees required, a regular
401(k) is probably not the best plan choice for a self-employed person due to plan set-up
expenses and the time commitment surrounding plan administration.
For self-employed people, there are several great tax-deferred retirement savings options
available beyond the traditional IRA. They include:
Simplified Employee Pension IRA (SEP-IRA) Plans – SEP plans are essentially
individual retirement accounts (IRAs). Like an IRA account, the money you contribute to a
SEP-IRA is tax-deductible and your investment earnings grow tax-free until you withdraw
funds at retirement. You can contribute up to 15% of your compensation or $30,000,
whichever is less, each year.
Keogh Plans – If your business is not incorporated, you may be eligible to establish
a Keogh plan. Keogh plans are generally more flexible than SEPs and may allow you to save
even more toward your retirement than you can in a SEP plan. Keoghs can be set up as
either a defined contribution plan (like a 401(k) or SEP) or as a defined benefit plan
(like a traditional pension). Along with added flexibility, Keogh plans also bear
additional complexity – if you're considering a Keogh plan, you should probably seek
the advice of a pension professional.
SIMPLE IRA – A SIMPLE IRA works a lot like a traditional IRA except that you can
contribute more (up to $6,000, or 15% of salary) and employer matching contributions are
allowed. If you are self-employed, you can contribute $6,000 as an individual and your
company can match your contributions dollar-for-dollar, for a total annual contribution of
$12,000. Another plus is that the SIMPLE plan you set up now can grow with your company
(up to 100 employees).
SIMPLE 401(k) – A SIMPLE 401(k) works much like the SIMPLE IRA with a few notable
exceptions. On the downside, it requires a lot more reporting and administration than a
SIMPLE IRA. On the upside, a SIMPLE 401(k) allows for hardship withdrawals and loans. The
maximum annual contribution is $10,000, and the maximum annual employer match is $4,800.
Setting up any of these plans for yourself is as easy as visiting your local bank, broker,
insurance agent or mutual fund company. |
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