Plans With Self-Employment

Last updated: March 28, 2016

SEPs (Simplified Employee Pension) and Solo 401(k)s

Self-employed individuals take a lot of risks investing in their own business and working hard to keep it going. Uncle Sam offers these entrepreneurs an extra incentive to save for retirement by allowing them to shield large chunks of money from taxes each year.

  • The two most popular options are SEP IRAs and solo 401(k)s.

SEP IRAs

The SEP is easier. It’s available through most mutual fund companies and brokerage firms, generally with the same range of investment choices as their IRAs.

  • You can contribute up to 25% of your net business income (which is business income minus half of your self-employment tax), up to a maximum deposit of $53,000 in 2015.

  • Like a traditional IRA, you have until April 15 of the following tax year to set up and fund a SEP IRA for the previous year.

Considering a Solo 401(k)

If you want to shelter even more self-employment income from taxes and don’t mind a little extra paperwork, consider opening a solo 401(k) plan. It has the same $49,000 maximum as a SEP, but because you fund your solo 401(k) as both an employer and an employee you can reach the maximum contribution with a lower income than you can with a SEP.

Solo 401(k)

With a solo 401(k), you can contribute up to $18,000 as an employee. Plus, you can kick in 20% of your business income with a maximum contribution of $53,000 in 2015.

  • If you’re 50 or older by the end of the year, you can contribute an extra $6,000 in catch-up contributions, for a total of $59,000. (SEPs do not permit catch-up contributions.)

  • You must establish a solo 401(k) by December 31 of the year for which you are claiming contributions, but you have until April 15 of the following year to fund it.

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