Tax-Deferred Plans for the Self-Employed: sometimes it is nice just knowing you have the option

In general, we believe that, if your employer does not match your contributions to a 401(k), a Roth IRA is a better option.  It can move with you as you switch employers and grows tax-free.  Whether you are employed or self-employed, you may open and contribute to a Roth IRA as long as you have an income and your MAGI is below $120,000 if you are single or $176,000 if married and filing jointly.  But if you are self-employed, you should know that you are not barred from having a 401(k) as well, just like individuals with employers – you have the option of having a tax-deferred retirement plan though a SEP IRA or a Keogh plan.

SEP IRAs and Keogh plans are designed for small businesses, and for the self-employed they work basically the same way.  You can set them up through a financial institution, and your maximum contribution depends on your net earnings through self-employment.  As your contributions will be tax-deferred, you may deduct a portion of them in your income taxes using a worksheet that considers your income as well as the deduction you already get for your self-employment tax (check out the IRS publication 590 to learn more ).

While a Roth IRA may be easier to set up and manage, knowing that you can also have a 401(k) as a self-employed individual may nonetheless come in handy if you make or expect to make more than the income limit for contribution to a Roth IRA, or if you would like to contribute more to retirement than the $5,000 allowed under the IRA plans.


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