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Self Employment and Your Retirement Security

© Ann Needle

Yes, here it is, a look at retirement savings options for those of you who are self employed (or hope to be!)

But, if you haven't done so already, your first savings priority should be to build an emergency account for times when business is slow. The rule of thumb is to have a year's worth of income saved in an easy-to-access place, such as a bank or money market account.

Once your short-term savings are shored up, look to your retirement. If you're married, one of the easiest and best options for retirement savings may be to maximize contributions to your spouse's 401(k) or similar plan, if available. These plans allow you to defer paying taxes on any earnings until withdrawal, and allow you to reduce annual taxable income by the amount of your yearly contribution. However, if you plan to take money out before retirement, the tax penalties (full taxes due plus a 10% penalty on the withdrawal) on a 401(k) make this option less attractive.

There are also a number of tax-advantaged retirement plans options available exclusively to the self-employed that may be ideal if you don't have access to a spouse's plan. These are -

Traditional IRA

Tax advantages: Similar to 401(k)s; may be able to deduct all or a portion of contributions

Annual contribution limits: $2,000 per person, plus another $2,000 if spouse isn't covered by anther retirement plan

Other notes: Deductibility of contributions is subject to income limits if you or your spouse is covered by another plan. Also, contributions limits are also reduced by any Roth IRA contributions you make in the same year (see below). You also need to contrast these benefits with what the Roth IRA has to offer.

SIMPLE IRA

Tax advantages: Same as with traditional IRAs

Annual contribution limits: $6,000

Other notes: One of the newer retirement plan options, SIMPLE can be a terrific deal if you want to contribute more annually than you can with a traditional IRA. As with the traditional IRA< also check out the Roth IRA.

Roth IRA

Tax advantages: Qualified withdrawals are tax-free earnings

Annual contribution limits: Same as the traditional IRA

Other notes: Contributions aren't tax deductible, contributions are subject to income limits - but the Roth can still be a better deal than a traditional IRA for some people, thanks to the tax-free status of certain earnings. This is especially true if you cannot deduct any traditional IRA contributions.

SEP (Simplified Employee Pension) IRA

Tax advantages: Contributions reduce income, earnings are tax-deferred