Self Employed Retirement Plan Options for 2009
One of the disadvantages of being self employed is the lack of an employer sponsored retirement plan. Fortunately, there are several options available depending on how much you want to contribute each year.
$6,000 or less
The simplest retirement plans are the Traditional IRA and Roth IRA which are available to everyone, self employed or not. Eligible taxpayers can contribute $5,000 per year to a Traditional IRA and/or a Roth IRA. Taxpayers who are 50 or older can contribute an additional $6,000. Most self employed people are not an active participant in an employer sponsored retirement plan. Therefore, they are eligible to make a tax deductable contribution to a traditional IRA. Self-employed people who are active participants in an employer sponsored plan such as a 410(k) may still be eligible subject to phase out rules based on adjusted gross income(AGI). Roth IRA eligibility is based solely on AGI. The phase out ranges are $166,000 – $176,000 (married filing jointly), $105,000 – $120,000 (single and head of household), and $0 – $10,000 of modified AGI for married filing separate.
$5,000 – $14,000
For the self employed who want to contribute more than a Traditional IRA would allow, the next option would be a SIMPLE plan. SIMPLE is an acronym for Savings Incentive Match Plan for Employees, and not a description of how easy the plan is. As the name implies, if you have employees you must make an employer contribution or match for them. But if you are your only employee the SIMPLE allows you to contribute up to $11,500 regardless of your age or income. If you are 50 or older you can contribute up to $14,000.
Up to $49,000
By employing a SEP (Simplified Employee Pension) plan, you can contribute up to 25% of your income to a maximum of $49,000. Like the SIMPLE, you must also make contributions for your employees which can be a significant factor to consider. But if you are the only employee, the SEP works very well. Another alternative that allows you to exceed the 25% limitation, is the solo 401(k) (often referred to as the solo k) which is a 401(k) plan for one person businesses. With the solo k you can make a salary deferral election of $16,500 ($22,000 if you are 50 or over) and also make an employer contribution of 25% of your income as long as it does not exceed $49,000 limit.
While the retirement landscape seems complex, a qualified financial planner can point out the advantages and disadvantages of the options and assist in designing the retirement plan which fits your goals and budget.