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Financial Briefs

 

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Retirement Plan Choices For The Self-Employed

If you are self-employed, have no employees, and have not yet started a retirement plan for yourself, you have several choices.

1.  Traditional or Roth IRAs.  You don't have to be self-employed to set up and contribute to these IRAs.  For 2016, you can put up to $5,500 into a traditional or Roth IRA if you're under age 50.  Contributions to a traditional IRA may be tax-deductible, depending on your income and whether you also contribute to a plan at work, and earnings in your account grow tax-deferred.  A Roth is funded with after-tax dollars but withdrawals during retirement are normally tax-free.  You can't contribute to a Roth if you're single and earn more than $117,000 in 2016 or are married and earn more than $184,000.  But there are no income limits on converting a traditional IRA to a Roth; you just have to pay income tax on the amount you convert.

2.  Simplified Employee Pension (SEP) IRA.  If you can put more than $5,500 into a retirement plan for 2016, this may be the vehicle for you.  You can put up to 25% of your self-employment income, up to a maximum of $53,000 in 2016, into a SEP.  Contributions are tax-deductible and earnings grow tax-deferred.

3.  SOLO 401(k).  With this kind of plan, you may be able to contribute more than you can put into a SEP IRA.  As an employee, you're able to contribute 100% of your earnings up to a maximum of $18,000, or $24,000 if you're 50 or older.  Then, as your own employer, you can add up to 25% of your earned income—your net earnings from self-employment minus one-half of your self-employment tax and the amount you already contributed to the retirement plan—up to a maximum of $53,000 for 2016.  We can help with any of these plans.




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