Retirement Plans For the Self-Employed



With a SEP IRA in 2009 there is a $49,000 maximum contribution. This IRA is easy to set up and requires minimal administrative responsibilities. Disadvantages of this option begin with the fact that contribution limits are smaller than the limits of an Individual 401k at the same income level. This IRA does not have a catch-up plan provision like the Individual 401k, and loans are not permitted.

Main advantages of SEP IRA are that annual contribution is based on a percentage of W-2 wages if your business is incorporated and a percentage of personal income if your business is a sole proprietorship. If your business is an S or C corporation, or a LLC taxed as a corporation, up to 25% of W-2 wages can be contributed into a SEP IRA.

If your business is a Sole proprietorship, partnership or a LLC taxed as a sole proprietorship you are allowed annual contributions up to 20% of your net adjusted self employment income (or net adjusted business profits) which can be contributed into a SEP IRA.

The SEP IRA is a great choice for self employed business owners who would like to contribute up to 25% of their W-2 wages or 20% of net self employment income. A SEP IRA has broad appeal due to its high maximum contribution limits and its ease to set up and maintain.


Main features of an individual IRA is that in 2009 there is a $49,000 maximum contribution ($54,500 if age 50+ due to a “catch-up” provision), tax free loans are permitted, and loans are permitted up to 1/2 of the total value of the Individual 401k up to a maximum of $50,000. Another feature of an individual IRA is that there is an option to make Roth 401k contributions with the salary deferral portion of the Individual 401k. Contributions into an Individual Roth 401k are not tax deductible, but withdrawals are tax free after age 59 ½.

One disadvantage of an individual IRA is potentially greater administrative responsibilities and administrative fees compared to other self employed retirement plans.

Advantages of this option are high contribution limits and completely discretionary annual funding requirements. An Individual 401k may allow a greater contribution at the same income level due to the way the contribution is calculated. Another important distinction between this self employed retirement plan and others is a loan provision.


Features of this plan are that, depending on the age and income of the business owner, annual contributions can exceed $100,000 or more. Also, loans may be permitted, however this may increase annual funding requirements.

Main disadvantages of defined benefits plans are that they can be more expensive to set up and to maintain, along with having rigid annual funding requirements.

Main advantages of this plan option are that you can contribute more than the contribution limits allowed by the SEP IRA or Individual 401k. Defined Benefit Plans also offer substantial tax deductible retirement contributions and significant future retirement income. Depending on your age and income the annual contribution to a Defined Benefit Plan can exceed $100,000. Lastly, defined benefits plan may be ideal for business owners who wish to shelter the largest percentage of their income and/or who want to make the largest retirement plan contribution permitted by IRS rules.


A Simple IRA is easy to set up and has low administrative responsibilities. With a simple IRA self employed individuals can elect to defer up to 100% of their income up to a maximum of $11,500 for the 2009 year or $14,000 if age 50+. In addition there is a maximum 3% employer contribution.

A disadvantage of this plan is relatively low maximum annual contribution limits, and loans are not permitted.

In conclusion if you are self-employed and looking for a retirement plan take into consideration the amount you believe you will contribute, and leave room for a potential increase in your contribution that you may decide to make. Also, review the tax implications of each plan, and keep in mind the set up and administrative aspect.

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