Being self-employed has many advantages compared to being an employee of a firm. However, retirement planning isn’t quite as easy as signing up for the company 401(k) plan like many of your friends do. That said, with some guidance from a qualified professional, you too have many excellent options. Below are a few choices to consider when planning for your retirement. I’ve focused on the options for those who are self-employed and do not have any employees, but the SEP and Simple options below are also available to those with employees.

Simple IRA

A Simple IRA is one option for self-employed individuals. The Simple IRA contribution limit is made up of two parts: employee salary reduction contributions and employer contributions. The employee contribution is limited to $11,500 for 2012. If you are over age 50, you can also make a catch-up contribution of $2,500 for 2012. And, since you are also the employer, you can then make an elective employer match of 3% of net self-employment earnings. You can deduct contributions up until the due date of your tax return, but you need to have the plan set up by October 1st of that tax year unless you are a new business.

There are a few other considerations. You can roll over into other types of IRAs; however, you can only do so after a 2 year participation period. Early distributions are subject to a 10% penalty like IRA accounts, but it increases to 25% if done within the first 2 years of participation.

Simplified Employee Pension (SEP) IRA

A SEP IRA is a retirement plan that potentially allows you to contribute more than the Simple IRA, but without the requirements of a more complex retirement plan. The IRS allows self-employed persons to set up and contribute to a SEP up until the due date (including extensions) of your income tax return for that year. For example, if you’ve filed for an extension on your 2011 tax return, you have until October 15th of this year to establish your SEP.

The SEP contribution formula can change depending on your business structure, so it is very important to work with a qualified tax professional to determine the proper amount. The limit is 25% of an employee’s compensation or 20% of your net earnings from self-employment, up to $50,000 for 2012.

Individual 401(k) or Solo 401(k)

A solo or individual 401 (k) is a qualified plan designed for self-employed individuals. Like a standard 401(k) plan through an employer plan, it allows for an employee contribution in addition to an employer contribution. For 2012, the maximum that an employee can put into a 401(k) is $17,000, plus a catch-up contribution of $5,500 if the participant is over age 50. With the employer contribution, the maximum is $50,000 for 2012 or $55,500 with a catch-up contribution.

While you have until the tax filing deadline (including extensions) to make a contribution to the plan, you would need to set up the solo 401(k) plan by the end of the tax year for which you intend to make a contribution. Also, if the plan has assets above $250,000, you would need to file a form 5500-EZ every year. In the final year of the plan, everyone should file a form 5500-EZ even if you had less than $250,000 of plan assets.

Which option is the best?

Many business owners find that the individual 401(k) allows them to contribute the most. However, this plan also comes with more difficulty depending on how the business is structured. Also, if you’re under 50 and make roughly $250k or more, the SEP might allow you to contribute the same as the individual 401(k), but without the filing requirements.

Here, I’ve only touched on the highlights of each plan. Each retirement plan has many other benefits and drawbacks, so it is important to work with a qualified professional who can guide you and help determine which is best suited for your business structure and retirement goals.

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