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Socking Away for the Future: Retirement Plans for the Self-Employed
Published on Sep 29, 2010
Read 'Socking Away for the Future: Retirement Plans for the Self-Employed' at 'Time to Start Up,' the small business blog by BizFilings.
As a small business owner, you may say "retirement schmirement." But there really are options that exist in helping entrepreneurs and self-employed individuals save for the future.
To start with, here's a little history lesson from the small business experts at Business Owner's Toolkit: "Before 1963, sole proprietors and partnerships were allowed to have qualified pension and profit-sharing plans for their employees, but the owners of these businesses could not get the tax benefits of the plans because they were considered owners, not employees. The only way to get the maximum retirement benefits for the owner was to incorporate" - (which by the way still is a great way to protect your assets, build credibility and enjoy certain tax advantages.)
"The Self-Employed Individuals Tax Retirement Act of 1962 (also called HR-10 or the Keogh Act), and its subsequent amendments made it possible for owner-employees of unincorporated businesses and other self-employed persons to be covered under qualified retirement plans. Over the years, this tax-favored treatment for retirement plans was extended to individuals not covered by other private qualified retirement plans. Available options include Individual Retirement Accounts (IRA) and Simplified Employee Pension (SEP) plans."
As a self-employed small business owner, your options include:
And here's a rundown of each type of plan:
Keogh Plans: Identical to corporate retirement plans, the Keogh plans for self-employed individuals come in two basic kinds: defined benefit pension plans and profit-sharing plans. To obtain a deduction for the current tax year, the plan must be established before the year's end. Once you have achieved this, actual contributions can be deferred until the extended due date for that year's return. For Keogh profit-sharing plans, annual contributions are based on a percentage of self-employment income or compensation and subject to a $49,000 ceiling. Keogh defined benefit pension plans are designated to deliver a targeted annual retirement benefit. An actuary calculates each year's contribution. The precise amount depends largely on your income, years until retirement and anticipated investment returns.
IRAs: IRAs serve as personal tax-qualified savings plans. Business Owner's Toolkit reveals, "anyone who works, whether as an employee or self-employed can set aside up to $45,000 in an IRA in 2010, and the earnings on these investments grow, tax-deferred, until the eventual date of distribution. Persons 50 and over may contribute an addition $1,000 annually ... IRAs are set up as trusts or custodial accounts for the exclusive benefit of an individual and his or her beneficiaries. You can set up an IRA simply by choosing a bank, mutual fund, brokerage house or other financial institution to act as trustee or custodian."
SEPs: Along the same vein, a SEP is defined by www.toolkit.com as a, "written arrangement that allows an employer to make contributions toward his or her own and employees' retirement without becoming involved in more complex retirement plans. The contributions are made to special IRAs set up for each individual qualifying employee.
SIMPLE plans: Last but not least, there's the SIMPLE plan option. Just like its name, the SIMPLE plan may be adopted by employers with 100 or fewer employees who received at least $5,000 in compensation during the preceding year. To establish this type of plan, it must be the ONLY retirement plan you have. Additionally, they may be structured as an IRA or as a 401(k) plan. To learn more, click here.
So if you think saving for the Golden Years is out of the question as a self-employed individual, think again. There are several options to choose from.
Check out these other helpful resources on your quest for more information about saving for retirement:
What options are you looking into for retirement?