Just because you are self-employed doesn’t mean you don’t have access to tax advantaged retirement plans. There are several options that may work for you depending on your situation. One option is to contribute to a traditional IRA or Roth IRA. In 2013, you can contribute up to $5,500 of earned income into an IRA ($6500, if you are over 49). However, you may be restricted due to income limitations. In addition to an IRA, consider establishing a SEP (Simplified Employee Pension), a SIMPLE IRA (Savings Incentive Match Plan for Employees) or a Solo 401k.
A SEP is a plan that enables you, as the employer, to set aside money for yourself and your employees. The entire contribution is made by the employer, and equal contributions must be made to all eligible employees – including you as the owner. The annual contribution is flexible, which allows you to adjust the contribution based on profitability for the year. In 2013, contributions cannot exceed the lesser of 25% of W2 earnings or $51,000. The limits are the same but some special rules apply, if you are self-employed. A SEP has low start-up and administrative costs with no filing requirements. SEP plans can be of most benefit to companies with few or no employees, since the entire contribution is made by the employer.
If you have several employees, a SIMPLE IRA plan may be the best option. Employers are required to make a matching contribution of up to 3% or a 2% non-elective contribution for each eligible employee. In 2013, employees may elect to contribute up to $12,000 plus a $2,500 catch-up if they are over 49. A Simple IRA is available to any employer with up to 100 employees. It is easy to establish and inexpensive to operate. Discrimination testing is not required and there are no filing requirements. A Simple IRA plan can be more practical than a SEP for companies with a lot of employees because most of the contribution is usually made by the employee.
Another option is a solo 401k. A one-participant 401k plan is a traditional 401k that covers a business owner with no employees, or a business owner and his or her spouse. A solo 401k generally has the same rules as a traditional 401k plan. As a business owner, you play the role of the employer and employee. As an employee, in 2013 you can contribute up to $17,500 ($23,000 if you are over 49) – up to 100% of your compensation. As an employer, you can contribute up to 25% of compensation. Total contributions, not including catch-up provisions, cannot exceed $51,000. If you hire employees who meet eligibility requirements, they must be included in the plan and their elective deferrals may be subject to non-discrimination testing. Additionally, if your solo 401k plan has more than $250,000 in assets, you must file an annual report.