Self-employed workers have the same retirement needs as the office-commuting population, only no beneficent employer offers carrots in the form of retirement benefits.

So they have to grow their own. Fortunately, Uncle Sam helps out by letting small-business owners stash away retirement savings in tax-favorable accounts designed especially for them.


A SIMPLE IRA is just that — pretty simple — but the name is an acronym for Savings Incentive Match Plan for Employees.

The plans are designed for small businesses with no more than 100 employees who earned $5,000 or more on the payroll for the previous calendar year. But some advisers and tax professionals think these plans are more suited for much smaller companies.

“I typically recommend them for employers that have seven or less employees and for someone who is not making a boatload of money, so not looking to throw a ton into retirement,” says certified public accountant Bryan Hopkins, president of Hopkins Wealth Management.

“It’s easy and simple. Including instructions, the account application is about four pages to fill out, and you can do it in 10 minutes,” he says.

  • Who can open one: Generally an employer with no more than 100 employees.
  • Cost and complexity: Low.
  • Employer contribution limit: 3 percent of employees’ pay, matching, or 2 percent nonelective.
  • Employee contribution limit: $11,500 for 2009.
  • Annual reporting requirements: None.


A SEP IRA, or Simplified Employee Pension plan, is as easy and low cost to set up and maintain as the SIMPLE IRA. But instead of the employee making contributions to the plan with a match from the employer, the employer makes the entire contribution.

Self-employed workers may find the SEP ideal due to its low setup and maintenance costs. Business owners can save quite a bit more in a SEP than the SIMPLE or other IRAs. For 2009, the contribution limit is 25 percent of net income up to $49,000.

June Walker, author of “Self-Employed Tax Solutions,” says that understanding the difference between net and gross income is very important for self-employed workers when it comes to figuring their retirement contributions. Gross income minus expenses equals net income.

As an example, say you receive $5,000 for a product, but you spent $1,000 on supplies and Web advertising to make that sale.

“That $1,000 subtracted from the $5,000 gives you $4,000 net. The net income is what your pension contribution is based on,” she says.

  • Who can open one: Any employer or self-employed person.
  • Cost and complexity: Low.
  • Employer contribution limit: 25 percent of employees’ net income up to $49,000.
  • Employee contribution limit: Not applicable.
  • Annual reporting requirements: None.

Solo 401(k)

Similar to a 401(k) used at companies across the country, a Solo 401(k) lets small-business owners share the fun and benefits. The business must be very small, however, limited to the owners of the business and their spouses.

The Solo 401(k) allows business owners to put away more money than a SIMPLE or SEP IRA, and there is some flexibility when it comes to contributions. You can contribute more or less every year, but a maximum of $16,500 for 2009.

A profit sharing component can also be added to the Solo-K.

“Business owners can add the profit sharing part to maximize contributions to the plan. The employer can make a maximum tax-deductible contribution to the plan of up to 25 percent of compensation,” says Robby Schultz, a financial adviser with the CPA firm, Rollins and Associates.

  • Who can open one: Self-employed business owners with no employees other than a spouse.
  • Cost and complexity: Medium.
  • Employer contribution limit: $16,500 of salary deferral plus 25 percent of compensation, or $49,000, whichever is less, if a profit sharing component is added to the plan.
  • Employee contribution limit: Not applicable.
  • Annual reporting requirements: Yes.

Defined benefit plan

The most expensive and complicated retirement plan for the self-employed, the defined benefit plan is most appropriate for someone with a mountain of money to save for retirement.

Employers can save a maximum of $195,000 per year. But you need an actuary to determine the amount that can be contributed, which adds to the cost of the plan.

“The defined benefit plan will give you your largest contributions, but it comes with strings attached. For instance, you have to have a plan document and work with an actuary. It will be the most expensive to do and will require you to make a contribution every year,” says certified personal accountant Gerald Wernette, director of retirement plan services at Rehmann.

In contrast, the Solo-K, SEP and SIMPLE IRAs allow more flexibility by allowing employers to reduce contributions in a year with poor cash flow.

Due to their expense and complexity, defined benefit plans are slightly out of fashion. According to the Pension Benefit Guaranty Corp., there are 38,000 defined benefit plans today compared to 114,000 in 1985. Despite their waning popularity, they can still be a good option for business owners who want to save the most money on a tax-deferred basis as possible.

  • Who can open one: Any employer of any size.
  • Cost and complexity: High.
  • Employer contribution limit: Up to $195,000, but the actual amount is determined by a formula used to calculate the benefit an employee earns for retirement. An actuary determines the amount to be contributed to the plan.
  • Employee contribution limit: Not applicable.
  • Annual reporting requirements: Yes.