Being self-employed certainly has its benefits. From being able to
throw your alarm clock out the window to having the opportunity to take a
three day weekend whenever you like, it is easily the best gig out
there. However, when it comes to retirement planning, being
self-employed has its drawbacks as well. If you had chosen to work
within a larger corporation, the chances are quite good that your
company might have set up and contributed to a retirement account for
you, thereby absolving you of the responsibility of handling the
situation yourself. But since you are on your own choosing the right
retirement plan early is essential to your financial state of being
later in life.
What Are My Options?
There are several kinds of retirement plans available for the
self-employed. A Simplified Employee Pension, also known as an SEP, is a
fairly simple, basic retirement plan. A Keogh is a bit more
complicated, but the benefits can outweigh the related complications.
Individual 401K plans offer some of the best self-employment benefits on
the market. Roth IRA plans are an excellent secondary retirement
savings plan. Spousal deductible
IRAs work well if your spouse has an established retirement plan at work.
Which Option Is Right For Me?
SEP Benefits: If you choose to go with an SEP plan, you are looking
at a simple retirement account that accepts contributions of up to
$44,000 per year. In general, you can contribute twenty percent of your
self-employment earnings to this type of plan without paying any taxes
on the money. One of the best benefits of a plan like this one is that
they are really easy to set up. They have no real ongoing costs, unlike
many of the other self-employment plans,, and they allow some fairly
serious contributions each year, helping you prepare for retirement at a
much earlier age.eogh Plans: As with an SEP plan, you can contribute twenty percent of
your earnings to a Keogh plan each year. The goal of this kind of plan
is to offer you your desired annual amount of retirement funds, and your
level of contribution reflects that each year. As a result, this might
be the right option for you if you are a bit behind with your retirement
planning. The primary problem with these plans, though, is that they
are difficult to set up. In most cases, you need a financial firm or
advisor to help you with the details and the IRS will want a detailed
report about your plan on a yearly basis.
Individual 401K Plans: The maximum amount that you
can contribute, tax-free, per year to a solo 401K plan is $44,000. If,
however, you are over the age of 50, that number goes up by five
thousand dollars. If you want to be able to stash quite a bit in your
retirement plan without paying taxes on it, this is probably the best
way to go, as with the high contribution limits, you could be ready for
retirement sooner than you think.
Roth IRA Plans: A Roth IRA cannot be your primary
retirement plan. However, if you have a good handle on your current
retirement savings plan, and you want to be able to put away additional
dollars for your golden years without paying the extra taxes, you can
add four thousand dollars to a Roth IRA each year. Eventually, you can
withdraw all of the money in this IRA without ever paying any money in
taxes on the funds.
Spousal Deductible IRAs: If your spouse works for a
company that has a strong retirement plan, you can contribute up to four
thousand dollars every year to that plan. This is a good path to take,
but in the end, the Roth IRA allows you to pay fewer tax dollars on
your retirement earnings.
