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Self Employment Retirement Plans

Take your ship home safe with self-employment retirement plans

The high 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.

Why it's important for self-employed folks to have a retirement plan?

You take 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!

Benefits of having a retirement plan - both for solo-preneurs and small businesses with employees

Statistics 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.

Don't 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 years,

You 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.

Which Self Employment Retirement Plan to choose?

Don't 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 to consider:

Stay with me. I will walk you through the whole set of options and it's going to be a breeze.

1.SEP 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.

2.SIMPLE 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 401(k) plan.

3.Qualified 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.

There 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.

In these 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.

Retirement Plan

Short Description



Traditional IRA

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

Roth IRA

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.

Tax-free growth

Income limits


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

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