Just because you are an entrepreneur doesn’t mean you can’t save for retirement. Nor does that mean there isn’t any way to save. In this article I’ll discuss retirement plan options for entrepreneurs to help you save for the day when you want to stop working.
Retirement Plan Options For Entrepreneurs: Simplified Employee Pension
One of the retirement plan options for entrepreneurs is the Simplified Employee Pension (SEP). This plan is simple in theory: You can contribute up to 25% of your net earnings of your self-employment earnings up to $61,000.
To create a SEP all you need to do is fill out one form: Form 5305-SEP. You can get this form from the IRS website. Or you can choose an IRS approved prototype SEP plan through a financial institution. After that you open a SEP-IRA with a financial institution and fund it with your net earnings.
If you don’t use a prototype SEP plan then you must keep it updated with the current laws. This could be confusing if you aren’t sure and are running the plan yourself. To keep yourself from making a mistake you should use one of the prototype plans or hire the services of a financial advisor.
Retirement Plan Options For Entrepreneurs: Solo 401(k)
Another option of the retirement plan options for entrepreneurs is the Solo 401(k). This plan works like Employer 401(k) plans, except for a Solo 401(k) you can invest up to $20,500 of your annual salary into a 401(k)-eligible plan with a financial institution.
In addition of contributing $20,500 of your salary, you can contribute another 25% of your net earning from self-employment up to a total of $61,000.
A final reason you should consider this plan because a Solo 401(k) doesn’t require discrimination testing.
Final Option: Savings Incentive Match Plan for Employees IRA
The final option is the Savings Incentive Match Plan for Employees IRA, or the SIMPLE IRA. This allows you put all your net earning from self-employment up to $14,000. Like the SEP, you have to complete a form to create a SIMPLE IRA. Depending on whether you use a designated financial institution or not, you will fill out a specific form. Then you choose a prototype plan from the IRS. Finally, you open the SIMPLE IRA with your favorite financial institution.
You can only create this plan between January 1 through October 1. If you start your business after that time-frame you can create the SIMPLE IRA as soon as it is feasible.