Making Sense of Retirement Plans: A Guide for the Self-Employed

From the Motley Fool,  Anna Wroblewska writes about retirement plan options for self-employer workers and freelancers.  She writes:

“As with most things in finance (and life), the best plan really depends on what you need. With that, what’s your goal? Let’s find the best plan for you.

I want to balance simplicity with high contribution limits 

To balance simplicity with high contribution limits, consider a SIMPLE IRA. It’s a lot like a SEP IRA if you don’t have employees, except that it offers higher contribution limits.

Your individual contribution maximum is $12,500 for 2015 ($15,500 if you’re over 50), and the employer match can be up to 3% with a further maximum of $12,500. You’ll also still retain the ability to contribute to your individual IRA, which you can’t do with a SEP IRA.

I want to maximize my contributions 

If you want to get the most juice out of your retirement plan, from a tax-savings perspective, anyway, you’ll want to take a look at the Individual or Solo 401(k).

These plans give you the usual 401(k) employee contribution of $18,000 for 2015 and a tax-deductible employer contribution of up to 25% of compensation. Together, the employer and employee contributions are subject to a further maximum of the  lesser of 100% of your compensation or $53,000 ($59,000 if you’re over 50).

Put simply, between yourself as employee and yourself as employer, you can set aside as much as $53,000 to your Solo 401(k) — if you earn enough. Oh, and you can still use your individual IRA.

I want to minimize penalties if I raid the account 

Of course, taking from your retirement funds is generally an inadvisable cash-flow management strategy, but let’s face it: Sometimes things happen.

If you’re looking to maximize flexibility, consider the Solo 401(k). These accounts can come with the option to take up to 50% of your balance, up to $50,000, as a loan. You might also be able to take hardship withdrawals, or pull money for other specified event noted in the plan document.

Be sure to review the plan document and your provider’s policies, however, as not all plans offer these features.

You can also take withdrawals at any time from SEP and SIMPLE IRAs, subject to the usual penalties. Beware, however, that if you could face a 25% penalty if you withdraw from your SIMPLE plan within the first two years of participating….”

For more tips, read the full story at Making Sense of Retirement Plans: A Guide for the Self-Employed

 

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