In this chapter:
Introduction
Retirement savings plans
The 401(k) plan
IRAs
Roth IRAs
The IRA decision
How your savings grow
Some (minor) drawbacks
Dividing your savings
Inflation & taxation
A newfangled pension
Questions & answers
Security and your 401(k)
The scoop on IRAs
Your savings priorities
If you're self-employed
Financial cramming
 

If You're Self-Employed

If you’re your own boss, consider opening one of the three basic types of retirement savings plans for self-employed people. The advantage of these plans is that they allow you to contribute (and deduct) much more than an IRA. 

The first type of self-employment retirement plan is called a simplified employee pension, or SEP, sometimes also referred to as a SEP-IRA. SEPs work pretty much like IRAs. The main difference is the amount of money you can contribute. You can contribute 15% of your first $170,000 of net earnings from self-employment to a SEP. (To figure out your net earnings you subtract your business deductions, half your self-employment tax, and your SEP contribution from your gross income. Consult an accountant to help you figure this out.) So, depending upon how much you earn, you can contribute (and deduct) as much as $25,500 annually to a SEP—clearly a more attractive option than a standard IRA. If you don’t have employees, a SEP-IRA is easy to set up; if you do have people working for you, however, you may have to contribute for them as well. 

If your self-employment doesn’t generate very much income, you might benefit more from the SIMPLE IRA than from a SEP. As the name suggests, SIMPLE IRAs are the least complicated kind of self-employment retirement plan. They allow you to set aside (and deduct) up to $6,000 a year—even if that accounts for all of your self-employment income. (You’d have to earn more than $45,000 to deduct that much in a SEP.) You may be able to contribute even more than $6,000, but the rules are fairly complex so you should talk to a tax advisor before making any decisions. One odd catch you should be aware of: If you want to set up a SIMPLE plan, you have to do it before October 1. (By contrast, SEPs can be opened right up to the April 15 filing deadline, more than six months later.) As with SEPs, SIMPLE plans may require you to make contributions to your employees’ accounts as well. They are best for people who earn a small income, generally in a side job like writing freelance or crocheting potholders.

Another option is a retirement plan known as a Keogh. A Keogh requires somewhat more paperwork, but it also has advantages. For starters, you may not have to make contributions for your part-time employees. There are also several different types of Keogh plans to choose from; the most popular is called a profit-sharing plan. You can contribute up to 15% of your first $170,000 of net earnings (up to a maximum of $25,500 each year) to a profit-sharing Keogh. With this type of Keogh, you can vary your contributions annually, meaning you’re not required to contribute a set amount each year. Other types of Keogh plans generally allow you to contribute more money (up to $30,000 a year), but you’re locked into contributing a set percentage of your earnings each year. 

For more details on all of these options, contact a no-load, low-cost mutual fund company.