Retirement plans for the self-employed

By David Essex, ITworld.com |  Career

One of the biggest drawbacks to setting off on your own as a consultant or
freelancer is losing company-funded retirement plans such as 401ks and pensions. But
unless you've already socked away enough money for retirement, it's not a good idea to
stop saving for the future just because you've lost access to such employer-sponsored
plans. Luckily, there are numerous tax-advantaged -- albeit self-funded -- vehicles for
putting money aside for the day when you stop working. And more options may be coming
soon.

I have been a full-time freelance writer since mid-1998, and I've pored over
financial Websites and Internal Revenue Service (IRS) publications more than is
probably healthy. I've been looking for retirement plans with high contribution limits
and a lot of tax advantages, plans with built in flexibility so that they can be put to
use for college and emergencies as well as retirement if need be. I've learned a few
tricks, dispelled some myths, and gotten a grasp on the pluses and minuses. My advice
should be pretty universal, but bear in mind who it's coming from: I'm an
unincorporated sole proprietor with no employees, a middle-income,
living-below-my-means do-it-yourselfer who would no sooner hire an accountant than I
would keep Emeril Lagasse around as my personal chef.

The basics

Retirement plans for one-person microbusinesses vary chiefly in their annual
contribution limits and in how they're reported to the IRS. They all let you buy into
the broad range of stocks, bonds, mutual funds, money markets, and other investments
offered by thousands of banks and brokerages, and are tax deductible.

Keogh plans let you contribute the most money -- up to around 19 percent of your
adjusted business income (the latter being what you clear after expenses, minus half
the self-employment tax, minus the contributions themselves). The annual contribution
can't exceed $30,000. Sales literature for all these plans often throws out
impressively high round numbers like 25 and 15 percent , but if you're self-employed,
your actual contribution is always reduced to a "percentage equivalent" that's about
three-quarters the advertised number.

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