The number of self-employed Americans has skyrocketed. Whether fully self-employed or supplementing your income, consider saving some self-employment income in a tax-deferred retirement plan. Here are four possible retirement plans for the self-employed.

1. Solo 401(k) Plans: 401(k) plans for small companies often have high administration costs and limited investment options. Solo (individual) 401(k) plans are now available through custodians such as Schwab, Vanguard and Fidelity. These plans are only available to the self-employed.

For 2012, the Solo 401(k) plan provides for a maximum employee contribution of $17,000 ($22,500 for individuals age 50 and over) or 100 percent of compensation, whichever is lower. However, the employer (you) can also contribute up to 20 percent of self employment earnings or 25 percent of W-2 earnings for an incorporated business. For 2012, the maximum total contribution from both employer and employee is $50,000 or $55,500 for those who are age 50 or above. If you participate in another company 401(k) plan, the maximum total individual contribution to both plans is limited to $17,000 ($22,500 if over age 50).

Solo 401(k) plans require that the self-employed individual and their spouse be the only two employees. Plans must be established by December 31st.

2. SEP IRAs: With a Simplified Employee Pension plan (SEP IRA), a self-employed person can defer up to 25 percent of their net self-employment income (maximum $55,000). The contribution is made by the company, providing for a company expense deduction.

Virtually any IRA custodian can set up a low/no cost SEP IRA. The SEP IRA may be funded as late as April 15th of the following year. Yearly plan funding is optional. However, the company must fund all employee’s SEP IRAs at the same percentage. If the company funds the owner’s SEP IRA at 25 percent, it must also fund all other employee’s SEP IRAs at 25 percent of income.

3. SIMPLE IRA: If you have or expect to have future employees, consider a SIMPLE IRA plan. For 2012, employees may contribute up to $11,500 ($14,000 if age 50 and above). The SIMPLE IRA plan requires company contributions for employees, but are typically less onerous than a SEP IRA plan.

Employers have two options for employee contributions. If the employer decides to include all employees in the plan, the employer must contribute 2 percent of each employee’s salary. The second option requires the employer to match an employee’s contributions of up to 3 percent of the employee’s salary. No employer contribution is required for employees who do not to contribute to their SIMPLE IRA.

SIMPLE IRA plans can have up to 100 employees, are easy to establish and typically have no custodial fees. The plan must be established by Oct. 1 of the year in which the plan becomes effective. While maximum deferrals are often less than SEP IRAs or Solo 401(k) plans, SIMPLE IRAs are often the retirement plan of choice for the self-employed person who plans to have employees.

4. Traditional or Roth IRA: For people with little self-employment income, the traditional or Roth IRA is often the retirement plan of choice.  With a traditional IRA, an individual may contribute up to $5,000 annually ($6,000 if over age 50), as long as self employment income exceeds the contributed amount. Active participants in a company retirement plan may only contribute the maximum amount to a traditional IRA if their modified adjusted gross income (MAGI) is less than $56,000 for an individual or $90,000 for a couple filing a joint return. If you have no retirement plan, but your spouse does, a maximum contribution to a traditional IRA is allowed if the MAGI of the joint return does not exceed $169,000.

Roth contributions are not affected by other retirement plans. However, in 2012 an individual can only contribute the $5,000 maximum amount ($6,000 if over age 50) to a Roth IRA if their MAGI is $110,000 or less. A married couple, filing jointly, can each contribute the maximum allowed amounts if their joint return MAGI is below $173,000.

Whether your self-employment is full time or just supplemental income, tax-deferred retirement saving should be an important aspect of your financial plan.

Categories: Finance