You hear and read a lot today about retirement and will there be enough money for you to retire. Lots of experts are predicting that as the baby boomers continue to retire, many of them will not be able to comfortably retire and have to continue to work to make ends meet. What if you work for yourself or are self-employed? How will you be able to afford to retire? Don’t the self-employed have the same retirement needs as the rest of us?
If you’re self-employed, then you have probably paid enough self-employment tax over the years. That money is intended to pay for your social security and Medicare upon retirement. Do you wonder that it is enough, or that it will still be available when you need? You can do more.
Most self-employeds are working lots of hours and do not have the time to learn about their retirement options. Therefore, below are the details on some self-employed retirement options for you. Specifically two different Self Employed Retirement Plans and there key features and benefits; the Individual 401k, SEP IRA. The Individual 401k and SEP IRA are the two most common retirement plans chosen by successful self employed individuals.
Similar to a 401(k) used at many companies across the country, an Individual 401(k) lets small-business owners share in the fun and benefits. The business must be very small, which in turn limits the plan to the owners of the business and their spouses. The plan is geared specifically for individuals who work solo as freelancers or contractors and make inconsistent incomes.
The Individual 401(k) may allow business owners to put away more money than a SIMPLE or SEP IRA because of the way it is calculated, into retirement at the same income level. And there is some flexibility when it comes to contributions as well. You can contribute more or less every year but a maximum in 2011 of 49,000, $54,000 if over fifty! Additionally, Plus, you can borrow from your Individual 401(k).
The administrative cost of the Individual 401(k) can be more expensive than other plans. The Individual 401(k) may seem like a simple option, however, you will need to contact a brokerage or bank to set it up. Setup fees will run $150-$300 depending upon the services you purchase, and annual fees may apply.
The individual 401 (k) however does not work well if you want to grow the business. If you plan to hire outside employees in the future, you’ll need to find another retirement savings option before you go the Individual 401(k) route. On the other hand, if you plan to reduce your business you can reduce administrative costs in your retirement plans as well. Money from other plans can be consolidated into an Individual 401(k).
SEPs – Simplified Employee Pensions
A SEP IRA, or Simplified Employee Pension plan, is as easy and low cost to set up and maintain as it gets. With this plan type, instead of the employee making contributions to the plan with a match from the employer, the employer makes the entire contribution.
Self-employed workers may find the SEP ideal due to its low setup and maintenance costs. Business owners can save quite a bit more in a SEP than the SIMPLE or other IRAs.
The SEP IRA works just like a traditional IRA. Contributions to a SEP are tax deductible, and you don’t pay taxes on the earnings. Unlike the Individual 401(k) you cannot take loans from your account, but you can make withdrawals. If you make withdrawals however without a rollover before age 59½, you will pay taxes!
The bonus to this plan is that you can vary the contribution percentage depending upon whether you experienced a good or bad year. During the good years you can contribute more, during the bad years you can avoid payment totally. While this plan doesn’t set a limit on minimum contributions, the maximum dollar contribution is $45,000.
The SEP plan is fairly simple to set up. And can be set up at your local bank, insurance agent, a mutual fund company, or even through an online brokerage firm with form 5305-SEP, with little or no cost. Additionally, you do not need to file annual government reports, and ongoing administrative costs are no more than those levied on traditional IRAs.
There you have it, the Individual 401(k) and the SEP retirement plans. The two most common retirement plans among the successful self-employed. In a later post you will learn about two more plans, the Defined Benefit Plan and the Simple IRA.