If you’re self-employed, you have several options for a retirement savings plan. The “best” plan for you depends on how much you want to save and whether your business has employees. The IRS publishes a pamphlet with a great overview, so I’ll just review the highlights.
Plans for everyone: the IRA and the Roth IRA
Contributions to a traditional or Roth IRA are limited to $5,000/year or to your earned income, whichever is less. If you’re over 50, you can put in an extra $1,000. Money put into a Roth IRA is post-tax, but withdrawals after age 59 1/2 are tax-free. Money put into a traditional IRA can be tax-deferred, subject to income limits, but growth and pre-tax contributions are taxed when withdrawn.
An employer can set up employee IRA accounts which can be funded through payroll deduction.
Best Reference: IRS Publication 590 — Individual Retirement Arrangements
SEP’s and SIMPLE’s
The Simplified Employee Pension (SEP) allows the self-employed person to sock away more money — 25% of net earnings, up to a maximum contribution of $49,000. An employer can also contribute directly to a SEP for employees.
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