Retirement options for people who own their own business are different from the options available to individuals who work for a company they do not own.  The majority of employees of companies in the United States participate in company-sponsored 401k retirement plans, and while that particular retirement plan is not available to self-employed individuals, there are a variety of tax-favored methods the self-employed can use to start saving for retirement.

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The most commonly used retirement plans for the self-employed are:

  • Solo 401k and Solo-K
  • Simple IRA Plan
  • Simplified Employee Pension IRA
  • Defined Benefit Plan

Here is what you need to know about each of the self-employed retirement plan options:

Solo 401k and Solo-K

As the name suggests, the Solo 401k is the self-employed retirement option most similar to the company-sponsored 401k plans.  The Solo 401k is the best option for small business owners that wish to contribute more than a SIMPLE or SEP IRA allows per year as it has higher contribution limits than the other two options of self-employed retirement plans.

To be eligible for the Solo 401k retirement plan, your business must only consist of the business owners and their spouses.  The contribution limitation for 2013 is $17,500 (

A Solo-K can be added to the Solo 401k to allow for the business to make a tax-deductible contribution to the Solo 401k plans up to the 25% contribution limitation or $49,000 (whichever is less).

Simple (Savings Incentive Match Plan for Employees) IRA Plan

For business owners with 100 employees or less earning at least $5,000 through payroll, the Simple IRA Plan is a retirement option that is one of the easiest to set up.  Employers are required to match the employee’s contribution dollar-for-dollar up to 3% of employees’ pay as a matching contribution to the retirement plan, or 2% nonelective.

An employee can contribute up to $12,000 per year in 2013 to their Simple IRA Plan (  If the employee also contributes to other employer retirement plans in the same year, the total contributions an employee may make in 2013 are $17,500.

Some Simple IRA Plans allow individuals who are 50 years or older to make catch-up contributions to their plan of $2,500 in the year 2013.

Simplified Employee Pension (SEP) IRA

For self-employed business owners who want to contribute more to their retirement plan than the SIMPLE or other IRAs allow, the Simplified Employee Pension (SEP) IRA is a good option.  SEP IRAs can be set up as easily as the Simple IRA, but instead of employees contributing to the retirement plan with an employer match, under Simplified Employee Pension plans, the employer makes the entire retirement contribution.

The contribution limits for 2013 are 25% of the employees’ compensation or $51,000. (

Defined Benefit Plan

For financially successful self-employed individuals, the Defined Benefit Plan may be the best option for retirement savings.  The business can contribute a maximum of $195,000 annually, but an actuary must be used to determine the exact amount an employer can contribute, adding to the complexity and expense of using the retirement plan.  The amount the employer contributes must remain consistent year after year, which makes the Defined Benefit Plan the least flexible of the self-employment retirement options.

If a business has fluctuating income, the other self-employment retirement options (Simple IRA, SEP Ira, and Solo 401k) all allow employers to reduce the amount of money contributed.

Under the Defined Benefit Plan, a specific amount of money will be received by the retiree each month.  The plan may specify the dollar amount or calculate the amount based on a formula using the number of years in service and a percentage of salary earned (

The retirement plan you choose will depend on the amount of income your business earns per year, the amount you want to contribute annually, and the number of employees in your business.

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