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Work for Yourself, Retire for Yourself

Whether you work for The Man or you work for yourself, you're going to want to retire someday.

If you're an employee, your company makes a lot of the logistical decisions about your retirement plan. They probably give you the option of using a 401(k) or something similar to set aside some of your salary for retirement. Then they give you a list of investments to choose from. You check the boxes, sign the forms, and go back to your computer terminal.

If you're self-employed, you've got a lot more options and a lot more decisions to make. It's worth the time and effort to check them all out, though, because you'll get benefits similar to those of your company-man neighbors. For one, you'll probably be able to deduct your retirement contributions from your income, and that will lower your taxes when you make your deposits.

You'll also be able to let your money grow untaxed, until it comes time to use the funds in retirement. The ability to defer paying those taxes can be a particular boon to the self-employed, whose income-tax rate may be more likely to fall in retirement. That could mean a substantial tax savings over the long run.

Let's look at some of your options.

IRAs
Like your average wage slaves, the self-employed can also save money in an Individual Retirement Account. IRAs come in two different breeds, the traditional and the Roth. You can read lots more about them in the Fool's IRA Center.

Both types of accounts allow savers to stash away up to $4,000 this year, or $5,000 for anyone 50 or older. Limitations on who can use these accounts may mean that they're not available for every self-employed person or that they're not the best option for you.

You may also think that $4,000 per year just won't be enough to get you to retirement. If that's the case, keep in mind that you're not limited to saving only in this account. Because you hold an IRA as an individual, you can also use one of these other retirement savings arrangements for your business.

SEP IRAs
SEP stands for "simplified employee pension." This is a special type of account that lets full-time and part-time self-employed people set aside money for retirement. As fellow Fool Tim Beyers explained in a recent article focusing on these accounts, the SEP IRA allows the self-employed to put away much more than they could in an individual IRA.

In 2007, the self-employed can save up to 25% of their net income or $45,000, whichever may be less. You'll have to do some math to figure out how much of this deposit may be tax-deductible. Take a look at this IRS publication for more details. (Link opens a PDF.) As with regular IRA arrangements, your money grows untaxed until you withdraw it in retirement.

SIMPLE IRAs
A SIMPLE ("savings incentive match plans for employees") IRA is an arrangement available to small businesses that's also open to the self-employed. Its contribution rules differ a little from those of the SEP-IRA and are a little more complex for the self-employed person.

Your contributions get divided into two parts. First, you can deposit up to $10,500 of your net self-employment earnings in 2007 to a SIMPLE IRA account, or as much as $13,000 if you're 50 or older. Second, you make a matching contribution of up to 3% of your business income. In other ways, these accounts work like other IRAs, and you'll pay your taxes when you withdraw the money.

Solo 401(k)
Just like your neighbors who work for The Man, the self-employed, too, can have a 401(k) savings plan. This option may allow you a larger contribution than some other accounts do, along with a catch-up contribution if you're 50 or older. Some plans also allow you to take a loan against your solo 401(k).

One other advantage of the Solo 401(k) is that, depending on the financial institution, the self-employed may get the option of saving their money in a Roth 401(k) account. Like the similarly named Roth IRA, the Solo Roth 401(k) requires you to pay tax before you contribute your dollars, but you avoid taxes later.

Once you start to delve into this arena, you'll find that even this isn't an exhaustive list. Seek out a little bit of help if you're stuck, but get to work. Even the self-employed want to quit working for that unreasonable boss someday!

Related working Foolishness

Time is running out on our special pass to the Rule Your Retirement service. You have only until March 12 to check it out free of charge, with access to stock and fund recommendations, interviews, and our online seminar, "How to Plan the Perfect Retirement." Join the Rule Your Retirement Open House before it's too late.

Fool contributor Mary Dalrymple tries to keep herself employed, and she welcomes your feedback. The Motley Fool has a disclosure policy.


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