YOU ASK:

What retirement plans can the self-employed choose between?

WE ANSWER:

Self-employed individuals such as partners in a business or sole proprietors, can still benefit from the favorable tax treatment that qualified retirement plans offer. Plans such as the Keogh and the solo 401k provide the self-employed with roughly the same advantages as the ones offered by corporate retirement plans.

How Keogh Plans Work

The Keogh plan is most popular with unincorporated business company owners. The Keogh contributions are tax-deductible and the investment assets are left to build up tax-deferred. The accumulations are not taxed until they are withdrawn or distributions begin.

There are certain limits (indexed for inflation) that apply to the contributions to the Keogh plan and the annual benefits under this retirement option:

  • Under a defined-contribution Keogh plan, the annual contribution limit for every individual self-employed participant is the lesser amount of $49,000, or 25 percent of their annual earnings.
  • For a maximum annual benefit in a defined-benefit Keogh plan, the individual self-employed participant can invest 100% of their average earnings not to exceed $180,000.

The Self-Employed 401k

The self-employed 401k, also referred to as solo 401k plan, is among the most attractive retirement plans available to the self-employed, since it combines some of the advantages of both an individual 401k plan and a profit-sharing plan. Individuals eligible for participation in the self-employed 401k include freelance practitioners, and business owners with no employees other than their family, such as partners in a company, sole proprietors, etc.

The contributions made to the self-employed 401k plan are tax-deductible and investment earnings accumulate on a tax-free basis. Sole 401k contribution limits saw an increase in 2009 and they are currently $16,500 for participants under age 50. Self-employed individuals aged 50 and over are allowed to make additional catch-up contributions of a maximum of $5,500 maxing out the 401k contributions to $22,000 for individuals over 50.

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