Best retirement plan for self employed
“The trouble with retirement is that you never get a day off.”
Do you enjoy the freedom of being self-employed? Self-employment is more about the individual targets, benefits, and success that follows. You are your own boss and you have the liberty to enjoy a three-day weekend or go for a mid-summer trip. According to Docstoc, there are more than 28 million small businesses in America and 22 million of these businesses comprise of self-employed individuals.
· 22 Million Self Employed Businesses in US
· 543,000 New Businesses Start Every Month
· 52% Small Businesses Start From Home
There is no doubt that self-employment is on the rise and if you are planning to start your business, you are on the right track. Before that, have you considered your after retirement life as a self-employed professional?
Self-employment is undoubtedly the best gig in the industry. However, despite of the benefits of self-employment, self-employed professionals do not enjoy the same luxury in retirement benefits. Every hired professional has a company looking after his/her retirement benefits, thereby absolving them from retirement worries. If you are self-employed, it might help to look out for the most suitable retirement solutions available in the market and choose the best retirement plan for self employed.
If you are self employed, there are several pension plan options that you can choose from. The best option depends upon your contribution and number of employees and associated retirement plan for them.
Simplified Employee Pension (SEP)
SEP or Simplified Employee Pension is the best option for self-employed professionals with no employees. It allows you to invest up to 25% of your net income or $51,000 (2013)/ $52,000 (2014).
Pros of SEP (Simplified Employee Pension)
- Minimal paperwork and easy to setup
- Fund account before filing returns with flexible contribution limits
- For new self-employed professional with employer 401(k) plan, SEP contributions have no effect on it
Cons of SEP (Simplified Employee Pension)
- Required to put same percentage contribution to employee’s retirement plans (conditions apply for employee eligibility: worked at least 3 out of last 5 years, expected earnings above $550, 21 years or older)
Solo 401(k) Plan
Solo 401(k) is among the best retirement plans for self-employed, especially if you have significant savings. Solo 401(k) benefits are quite similar to the traditional 401(k) plans; these plans work well for self-employed professionals with no employees.
Pros of Solo 401(k)
- Generous contribution limits: Salary deferral contributions of $17,500 (+$5,550 for 50 years or older professionals) and 25% profit sharing contributions (up to $52,000 for 2014)
- Loan availability against account balance
- Both tax-deductible and Roth contributions available
Cons of Solo 401(k)
- No extra employees participation allowed
Simple IRA (Savings Incentive Match Plan)
Simple IRA is specifically designed for self employed and small business owners with less than 100 employees. If you have employees earning more than $5000 per year, then you need to match dollar-for-dollar contribution for up to 3% of your employee’s salary or flat 2% of your employee’s payment.
Pros of Simple IRA
- Easy paperwork and limited employee contribution burden
- Maximum salary deferral contribution of $12,000
Cons of Simple IRA
- 25% penalty for withdrawal within 2 years of investing
- Not useful for self-employed with existing employee 401(k) plans
Other significant retirement plans
- Defined Benefit Plan
- Keogh Plans
- Spousal Deductible IRAs
In short, the market is full of retirement plans for self employed but the trouble is to choose the best retirement plan for self employed. These are some pointers that you must consider before making a final choice.