As a self-employed individual or small business owner, you may have to be more pro-active than others when it comes to retirement plans. You may be familiar with SEP and SIMPLE IRA plans, as they are relatively simple and inexpensive to administer. However, you may not be aware that an Individual 401(k) plan could be to your advantage in its combination of benefits.

Simplified Employee Pensions (SEP) 

Simplified Employee Pensions are a good fit for sole-proprietors or businesses with only a few employees. They are simple, easy to set up and maintain, and have flexible contribution options. The employer makes the contributions for all employees.

SIMPLE IRA

Savings Incentive Match Plans for Employees are IRAs that work best for businesses with no more than 100 employees. Both employees and employer may contribute. Administration of the plan is simpler than with a 401(k).

Individual 401(k)

An Individual 401(k) plan is a regular 401(k) married to a profit-sharing plan. It can only be used by self-employed persons or owners of small businesses, who have no other full-time employees, other than a spouse. Since no two business are alike, and Individual 401(k)s can have drawbacks, it’s best to speak with your financial professional.

Note that a trustee is needed to hold the assets on your behalf; institutions offering these plans may have limited investment choices; and you must pay to establish the plan, which requires a written document describing the plan and how it works.  

• The allowable contribution to an Individual 401(k) is as large or larger than you could make under another type of retirement plan. Contributions are completely discretionary. In 2007, for instance, you could have deferred up to $15,500 of your compensation ($20,500 if you were age 50 or older). In addition to that, your business could have made a maximum tax-deductible contribution of up to 25% of your compensation.
• The plans are not bound by the complicated administrative rules that come with regular 401(k)s.
• You pay no income tax on contributions or earnings until you withdraw money from the plan. 
• You can borrow and make hardship withdrawals from the plan. You can also roll over funds from other retirement savings vehicles.

Life Insurance

No, life insurance is not a retirement plan.  But if you are self-employed, it is important to know that your need for life insurance is especially critical.  As sole proprietor, you are personally responsible for the all the debts of your business – debts that would then be the responsibility of your estate. Protect your family from severe hardship; speak with a financial professional about the type of policy that could help protect your family’s future.