Self-Employed Retirement Magic

By MP Dunleavey Tuesday November 10, 2009


It's much harder to save when you're self-employed. Nobody in HR is going to coax you out for a power point, some coffee and a few prospectuses—and then set up automatic contributions for you.

You have to do it yourself. And you must. And with Daily Worth's growing arsenal of retirement planning strategies, your future security is almost in the bag—as soon as you set up that sweet little retirement account.

A relatively new option you may want to consider is the solo 401k.

Normally, a 401k plan is run by a larger company for its employees. The advantage of a 401k account is that it lets people save a lot more than traditional IRAs (individual retirement account), and many companies offer matching funds.

A solo 401k allows you to sock away $16,500 of your gross income; then you can match yourself, the same way a company would--but for a heftier gain.

»In addition to the $16,500, you can then stash an additional 25% of your gross income (or 20% if you're a sole proprietor), up to a total of $49,000 if you're under 50, $54,000 if you're 50 or older.

Even better, the more you contribute, the more you save in taxes (i.e. you deduct all contributions from your gross profits and only pay tax on the remainder).

These are the current limits for 2009. To learn more, read this nifty breakdown from SmartMoney.

How does that stack up against a SEP IRA, which is another popular self-employed retirement account?

Let's say you earned 80,000 in 2009.

• With a SEP IRA, you could save up to $20,000.
• With a solo 401k, you're able to save up to $36,500.

You may read these numbers and think: I'm lucky if I can save a few thousand! But someday, your company could bring in the kind of revenue that will allow you to sock away serious dough—and then you'll want the best option possible.

Here's and a calculator on PensionOnline.com.