Pick the best self-employed retirement plan

Highway sign with Retirement-Next Exit

Being your own boss has a lot of advantages and one of them is being able to choose the retirement plan you want.

Whether you earn all or part of your living from self-employment, three popular types of plans -- the SEP-IRA, SIMPLE IRA and the Individual 40l(k) plan -- can help you save.

These plans may be better for a lot of people than a traditional Individual Retirement Account because they allow higher contributions and are always tax-deductible.

Annual contributions to a traditional IRA top out at $5,000 ($6,000 for those age 50 and older), and they are only deductible under certain circumstances.

Other advantages shared by all three plans allow:

But they also differ in a number of key respects, including maximum contributions and how much the employer must kick in for eligible employees.

Here's how to choose the one that's right for you.

SEP IRA: Simplified Employee Pension Individual Retirement Account

Who is it best for? Business owners who work alone. It's the most expensive option if you have employees, because you must contribute the same percentage of earnings for all eligible employees as you do for yourself.

How much can you contribute for yourself? Up to $13,940 with an annual compensation of $75,000, or $7,435 for an owner making $40,000.

What are the early withdrawal penalties? 10% on distributions taken prior to age 59½, plus payment of deferred income taxes.

SIMPLE IRA: Savings Incentive Match Plan for Employees Individual Retirement Account

Who is it best for? Businesses with employees, because workers are expected to make voluntary contributions through payroll deductions. Employers are only responsible for matching a portion of those contributions.

How much can you contribute for yourself? Up to $13,578 if you're under 50 years of age and have annual compensation of $75,000 or $12,608 for an owner making $40,000.

Up to $16,078 if you're 50 or over and make $75,000 a year or $15,108 for an owner making $40,000.

What are the early withdrawal penalties? 25% if you're younger than 59½ and the withdrawal is taken within the first two years of participating in the plan, plus payment of deferred income taxes.

INDIVIDUAL 401(k) PLAN

Who is it best for? Business owners who want to stash away as much as absolutely possible. This scaled-down version of the popular plan at larger companies lets you contribute more than either a SIMPLE-IRA or SEP-IRA.

Like a SEP-IRA, employers who contribute for themselves must also contribute the same percentage of earnings for employees. That makes them best for those who work alone or with family members.

How much can you contribute for yourself? Up to $30,440 if you're under 50 years of age and have annual compensation of $75,000 or $23,935 for an owner making $40,000.

Up to $35,940 if you're 50 or over and make $75,000 a year or $29,435 for an owner making $40,000.

What are the early withdrawal penalties? 10% on distributions taken prior to age 59½, plus payment of deferred income taxes. But the company you choose to manage your plan may allow you to borrow against your savings without incurring any penalties -- something you can't do with any type of IRA.

While all of these plans are relatively simple to use and readily available from brokerage firms and mutual funds, it's probably a good idea to consult a tax adviser before deciding which is right for you.

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