Do-It-Yourself Retirement

Here at, we spend a lot of time writing about huge employers, such as Intel (Nasdaq: INTC  ) , Lockheed Martin (NYSE: LMT  ) , and Wal-Mart (NYSE: WMT  ) , and the effects they have on the national labor market. Yet you might be surprised to discover that exactly none of these firms is the heavy when it comes to the American workforce.

Who is? Not to sound trite, or too much like Time, but it's actually you. Government statistics say that 19.5 million Americans were self-employed in 2004. And 16.9 million of those were sole proprietors. All told, roughly 75% of U.S. businesses have zero employees.

When you're on your own
As a contract writer for the Fool, I'm one of that three-fourths. That makes me responsible for health insurance, taxes, and -- drumroll, please -- retirement.

Surely the idea of funding your own retirement will sound excruciating to some. No pension? No 401(k)? No automatic deductions? No investment adviser? It's enough to make most dyed-in-the-wool corporate types break down in tears.

Not for me. I celebrate the flexibility that comes with investing my own retirement dollars. I think you should, too, if you're already self-employed or are thinking of making a change. Why? Two excellent investment accounts called the SEP IRA and the Self-Employed 401(k). Today begins a two-part series examining both, beginning with the SEP.

What it is
Here's how Investopedia defines the SEP, which stands for simplified employee pension:

"A type of retirement plan that an employer can establish, including self-employed individuals. The employer is allowed a tax deduction for contributions made to the SEP Plan. The employer makes contributions to each eligible employee's SEP IRA on a discretionary basis."

Sounds good, right? Of course it does. But here's the best part: With a SEP, as much as 25% of business profits -- up to $44,000, or $48,000 if you qualify for catch-up contributions -- are eligible for savings. And because the account is self-directed, you can invest in almost anything your broker offers. That includes stocks, options, bonds, and, of course, mutual funds. (The feds don't allow you to short stocks in retirement accounts.)

How it works
Then there's the deduction. Assuming you run a business that produced $100,000 in net income in 2006, and you're the only employee, then you'd be eligible to sock away up to $18,587. Mix in a $7,065 deduction for one-half of self-employment tax and your taxable income would fall from $92,935 to $74,348. Talk about a steal.

If there's a problem with the SEP IRA, it's that it is best suited for workers who generate high profit margins or lots of business income. Those who don't may be better off with the Self-Employed 401(k), which, like its more commonly known cousin, allows for a salary deferral that's not indexed to income. But I'll cover that in more detail on Friday.

For now, here's a list of discount brokers that also administer SEP accounts:

You can learn more about these and others in our Broker Center. Need more retirement advice? Consider our Rule Your Retirement newsletter. Editor Robert Brokamp is hosting an open house all week. Through March 12, you can check it out free of charge -- including stock and fund recommendations, interviews, and our online seminar, "How to Plan the Perfect Retirement." Click here to get started.

Fool contributor Tim Beyers, who is ranked 1,023 out of more than 23,900 in our Motley Fool CAPS investor intelligence database, writes weekly about personal finance and investing basics. Have a Foolish money tip? Tell him.

Tim didn't own shares in any of the companies mentioned in this story at the time of publication. Tim's portfolio holdings can be found at his Fool profile. His thoughts on retirement, Foolishness, and investing in general may be found in his blog. Intel and Wal-Mart are Inside Value recommendations. The Motley Fool's disclosure policy sees you on a beach sipping pina coladas in a few years.

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