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If you currently run your own business or are thinking about going into business for yourself, it’s important to ensure that you have a solid retirement plan in place. While there are numerous retirement plans in the marketplace, three are commonly used by the self-employed or by small business owners.
The SEP, or simplified employee pension, is similar to an IRA, or individual retirement account. When you establish an SEP, you can take advantage of a tax deduction based on the amount of your contribution. You can put up to 25 percent of your salary into an SEP. A big benefit of SEPs for self-employed people is that it’s OK if the contribution varies from year to year. This is a plus for years when your earnings fluctuate.
If you own a small business and want to set up a retirement plan for yourself and your employees, consider a SIMPLE IRA, also known as the SIMPLE. The SIMPLE is similar to the SEP in that contributions are tax-deductible. The main difference is that employees and business owners can make salary deferrals and a small business owner contributes to each employees SIMPLE account.
Another popular option is known as the self-employed 401K. It used to only be available to small businesses with at least 20 employees, but is now available for individuals with no employees or one employee. The self-employed 401K is an attractive alternative to the SEP if you are seeking a plan with a higher contribution limit than what the SEP affords.
