I found this video by CNN/Money’s Walter Updegrave a short, sweet summary of the two kinds of retirement plans designed for self-employed people.
• One is called a SEP IRA. You can sock away 25% of your net self-employment income, up to $50,000.
• This other is called a solo 401(k) or uni(k). You can contribute even more to it — 25%, plus an additional $17,000.
You get a big tax break on both of these — you don’t pay taxes on the amounts you put in, which can then grow at a faster rate because they are starting from a bigger base. If you wait until you are 59-and-a-half, you can withdraw the money tax-free, too. If you withdraw it before then, you’ll pay income tax.
Every year, I use a SEP IRA as a vehicle for reducing my tax bill. I wait until it’s time to file taxes; when we get our tax bill, I then figure out how much I want to reduce it by the size of the contribution. This is probably somewhat like the tail wagging the dog, but I don’t worry too much about it because the contributions are usually much larger than the recommended amounts.
Updegrave says, “The important thing is that you put something away on a regular basis. … Social security alone won’ t make for a very cushy retirement.”
A recent report from the Aon Hewitt consultancy, reported on by Andrea Coombes at the Wall Street Journal, says that you need to have saved 11 times your pay by the time you retire.
Retirement plans for the self-employed