Self Employment Retirement Plans
your ship home safe with self-employment retirement plans
of being self-employed never really wears off. One year down the line
or 10 years down the line, you wake up in 'Freedom City' every
morning. It's your call, your rules and your game! (Neither is
solitaire the only game in town.) However, you owe it to yourself to
keep that joy intact when retirement comes.
it's important for self-employed folks to have a retirement plan?
for granted certain benefits when you are employed full-time. These
include Health Insurance, Disability, Vacations, 401K match etc.
Self-employment retirement plans should be an integral part of any
solo flight. You're taking your ship home – safe and steady? Right!
of having a retirement plan - both for solo-preneurs and small
businesses with employees
say retirement could last for 30 years or more for an individual and
a common rule of thumb is that a retired person would need up to 80
per cent of their current annual income to retire comfortably. Also,
the average monthly amount paid by the Social Security Administration
in the form of a benefit is $1,153? A self-employment retirement plan
is therefore, an absolute must for solo-preneurs.
forget retirement plans even if you have a small business with a few
employees. Retirement benefits would make your compensation package
attractive and retain skilled workers. As an entrepreneur, heading a
small business, you could truly motivate your staff by contributing
to their retirement plans – particularly if you decide to
contribute a percentage of your business profits to employee
retirement plans. It puts you ahead of the field as several other
small businesses don't do this. You would surely improve employee
retention If you spread out these retirement investments over several
could also go for tax deduction for all the qualified contributions
to your retirement plan. Your employees could also defer some of
their taxable compensation to lower their income tax for the year.
You could personally too defer part of the net earning by putting it
into your retirement account. You could also go for a tax credit for
setting up this retirement plan.
Self Employment Retirement Plan to choose?
worry, it's not as troublesome as it sounds. A little research got me
these basic facts and I think anyone could easily build their
self-employment retirement account. There are three sections you need
with me. I will walk you through the whole set of options and it's
going to be a breeze.
plans: Under a SEP, you
make the contributions to a traditional individual retirement
arrangement called a SEP-IRA set up by or for each eligible employee,
including yourself. A SEP-IRA is owned and controlled by the
employee, and you make contributions to the financial institution
where the SEP-IRA is maintained.
plans: Generally, if you
have 100 or fewer employees who received at least $5,000 in
compensation last year, you can set up a SIMPLE plan. Under a SIMPLE
plan, employees can choose to make salary reduction contributions
rather than receiving these amounts as part of their regular pay. In
addition, you will contribute matching or non-elective contributions.
The two types of SIMPLE plans are the SIMPLE IRA plan and the SIMPLE
plans. The qualified plan
rules are more complex than the SEP plan and SIMPLE plan rules.
However, there are advantages to qualified plans, such as increased
flexibility in designing plans and increased contribution and
deduction limits in some cases.
are two basic kinds of qualified plans: defined contribution plans
and defined benefit plans. In a defined contribution plan, a certain
amount is contributed to the employee’s retirement account and
benefits are based on the amount contributed and accumulated in the
employee’s retirement account. In a defined benefit plan, the
benefits are pre-determined, and contributions are made based on what
is needed to provide those benefits.
three types of plans, here are the most popular self-employment
retirement plans with their basic advantages and limitations. Please
select a plan to learn more about it.
If you can contribute to your IRA at least as
much as you earn from self employment then this is the simplest account
to set up. For 2010, the maximum contribution to this type of
self-employment retirement plan is $5,000 if you’re under the age of
50, and $6,000 if you’re 50 or older.
Simple to set up,
tax deferred growth
You or your spouse
should not have another retirement account, pay tax at withdrawal time
If you're looking for tax-free growth and are
within the income limits defined then you could try this plan.
Basically, if you’re married and make more than $167,000, your ability
to contribute to a Roth is reduced and then completely phased out once
your income is above $177,000. If you’re single, the contribution phase
out starts at $105,00 and your ability to contribute is completely
phased out at $120,000. These numbers are for the tax-year 2010.
You should be able to contribute about 25% of
your net self employment income but your maximum contribution would be
limited at $49,000 (for tax-year 2010).
Easy to set up, standard forms
Must contribute 20% of income so if income is
low then not a good idea
Requires dual contribution. One part from the
employees and one from the employer. As a self-employed person you
contribute a percentage of your net earnings plus either the matching
contribution of up to 3% of your net earnings, or the non-elective
contribution of 2% of your net earnings.
Low or no cost plan, does not require an
annual IRS filing, Matching or non-elective contributions you make as
the employer are not subject to these taxes.
Employers must make a contribution, Plan to
be offered by businesses that have less than 100 employees only. Salary
reduction contributions are subject to Social Security, Medicare and
federal unemployment taxes.
Requires a written plan which could be the
prototype of an IRS or designed by yourself or your tax consultant. All
financial institutions would help you set it up. You have to invest the
assets of the plan in a custodial account or a trust with the help of a
legal instrument. You would require legal help for this. You must issue
a notification for your employees once the plan is established.
Low-cost plan, Employer contributions might
be vested over time according to plan terms, Employers use vesting
schedule to motivate employees, Not mandatory for employers to
contribute, Unlike a Roth IRA, employees with relatively high incomes
can still make contributions. The regulations are same for the SIMPLE
IRA plan if you want to set up the plan for yourself.
Requires an annual IRS filing, Depending upon
plan design might require employee discrimination testing.
This is a qualified retirement plan created
by self-employed individuals but is a little complex and has certain
costs associated with it. An individual with earnings from
self-employment may create and fund a Keogh Plan, even if he is also an
employee elsewhere covered by a workplace retirement plan.
Compared to the better-known 401(k) plan, an
important Keogh plan benefit is potentially significantly higher
contribution limits. You can make very large contributions to the plan
and still get a large tax deduction. Contributions get a tax deduction
for the tax year to which the contributions are designated.
The precise amount you can contribute to a
defined benefit Keogh plan depends on sophisticated actuarial
calculations. The results of these calculations are influenced by your
income, desired retirement benefit, anticipated length of time until
retirement, and expected rate of return from investments, Defined
benefit Keogh need the help of an actuary. Self-employed individuals
with no employees looking for a basic defined contribution plan might
use a SEP-IRA, since that plan provides the benefits of a Keogh without
the corresponding hassles and costs.
Solo 401 (K)
Requires paperwork and is the newest
self-employed retirement plan. The contribution limits are $16,500 if
under age 50, and $22,000 if age 50 or older. You have to file
informational returns once you have more than $250,000 in the plan.
Many brokerage firms have low-cost solo 401(k) plan options and often
allow you to invest in a broad array of investment options, similar to
an IRA or SEP.
Best flexibility, highest income contribution
limits, offers great tax benefits as compared to a SEP because the
401(k) contribution is not restricted to a percentage of your pay.
Too much paperwork and have to file
informational returns after a certain limit