Retirement Planning: Self-Employed

Many self-employed folks worry that they may not be able to open a retirement account. After all, most retirement savings accounts are held through companies. This means that people who work for companies automatically get exposed to a retirement account. And many companies offer matching, so that means that contributions can be maximized.

While you won't be able to use matching, as a general rule, it is still possible to set up a retirement account when you are self-employed. Indeed, it is just as essential that you do so as a self-employed person as it is for someone who works for "the man."

SEP

This type of IRA is an account that is convenient for many who are self-employed. This retirement account is easy to set up, and easy to administer. Additionally, you do not have to submit any government reports. And they have contribution limits. Additionally, you can deduct up to 20 percent of your income (up to $46,000) as a self-employed person from your taxes. Earnings are tax-deferred, meaning you don't have to pay taxes on what your retirement account earns until after you withdraw it from your account.

Keogh

This is something that you might consider setting up if you are self-employed, but hiring others. You can use it as a profit sharing or direct benefit plan for your small business employees. However, it can be difficult to set up. If you are going with the Keogh plan, you need a professional to help you. This also has high contribution limits, and is tax-deferred.

Solo 401k

Contrary to what some believe, you do not have to be working for someone else in order to have a 401k. It is possible to set up a solo 401k for the self-employed. Again, contribution limits are high and tax-deferred. Talk to a financial planning expert or a knowledgeable accountant about whether or not the Roth 401k is available on a solo basis.

IRA

Anyone who pays taxes can set up an IRA. There are two types: traditional and Roth. The Roth has tax benefits that shield you from ever paying taxes on the earnings in your retirement account. But the Roth IRA has lower contribution limits, and an income restriction. A traditional IRA allows you to deduct a portion of your contributions from your taxes, and is taken from your earnings pre-tax. But you do have to pay taxes on your earnings when you make withdrawals.

It is also possible to set up a spousal IRA if your spouse does not work, but you file jointly.