Simplified Employee Pension Plan SEP-IRAs

A SEP-IRA is a simplified employee pension plan that uses an IRA format. A SEP is by far the easiest self-employment plan to use  and set up.

A SEP-IRA is a simplified employee pension plan that uses an IRA format. A SEP is by far the easiest self-employment plan to use  and set up. A call to your favorite mutual fund company will get you an application as well as help in calculating how much you can contribute.

Your annual contribution rate is the lesser of $25,000 or 15 percent of compensation. The maximum amount of compensation that ca be used in determining contributions is $170,000. The contributions are deductible for the year for which they are made and can be made when you file your tax return.

If you have employees, they must be included in the plan, and they would receive the same percentage for compensation that you choose for yourself. You make contributions directly into their self-directed IRA accounts, and they make the investment choices. A feature that is useful for small business owners is that, if you are having a poor year, you are not required to contribute to the SEP for you or your employees.

An employee is anyone who is at least 21 years of age, has performed services for you, and has received at least $400 in compensation. Plan assets compound tax deferred, and you can't take the money out before you reach 59 1/2. Yup, there is a 10 percent penalty here also.

Keogh Plans

Keogh plans allow the self-employed individual to contribute the lesser of $30,000 or 15 percent of compensation into a profit-sharing plan.

Keogh plans allow the self-employed individual to contribute the lesser of $30,000 or 15 percent of compensation into a profit-sharing plan. If the plan is combined with a money purchase plan, however, the individual then can contribute up to 25 percent of compensation or $30,000, whichever is less, but you must split the contributions between the plans.

Sound complicated? They are, and you will definitely need some help setting them up. But among the plans available to self-employed, these offer you the ability to put away the most money for your retirement. Your employees must be included as well. You can require that they be 21, have worked for you for one year, and be working full time. These plans do have reporting retirements, and you must file form 5500 annually to the IRS.