Owning your own business has its advantages, but when it comes to estate planning and retirement planning, there can be challenges. In particular, small business owners do not have the luxury of an employer sponsored retirement or pension plan at their disposal – for they are the employer.
Over the last two decades, there have been several new retirement plans that have become popular, particularly for the self employed or small business owner. Three of the most popular choices are:
The self-employed or small business owner may choose to open a Roth IRA. With a Roth IRA , you do not receive the tax savings for your contribution, but the money grows tax free once it’s in the plan, and when you take distributions during retirement, they are not subject to federal income taxes. The income limitations can be restrictive for a Roth IRA, as if you are married and your adjusted gross income is over $177,000, you will be unable to take advantage of this account.
Simplified employee pensions retirement accounts are designed specifically to appeal to small businesses, as they are easier to create and administer than a cumbersome 401(K) plan. A small business owner may contribute up to 20% of their business income annually (25% if their business is incorporated). The annual contribution is capped at $49,000 for 2010, much more than the $16,500 annual contribution limit for a 401(K). You can open a SEP IRA at just about any brokerage firm and have several investment options available to you.
A solo 401(k) plan can be created by those who are self-employed, such as consultants, but you must not have any employees besides yourself and a spouse. If you meet the criteria, this retirement plan allows you to make a contribution of $16,500 or $22,000 of your self-employment income each year, if age 50 or older. In addition, you may make a profit sharing contribution to your plan, bringing the maximum contribution up to $49,000 for the year.
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