I’m self-employed and want to set up a retirement-savings account. Which type of account should I open? What’s the deadline for 2013?
Two of the best retirement-savings options for self-employed people are a solo 401(k) and a simplified employee pension, or SEP. Contributions to either type of account are tax-deductible and grow tax-deferred until you tap the money in retirement.
The deadline depends on the type of account you choose. You must set up a solo 401(k) by Dec. 31, if you don’t already have an account, but then you have until April 15, to make your 2013 contributions. You have until April 15, to open a SEP account and make your 2013 contributions.
In a solo 401(k), you can contribute up to $17,500 plus up to 20 percent of your net self-employment income (business income minus half of your self-employment tax),
for a maximum contribution of $51,000 for 2013. Your total contributions cannot exceed your self-employment income for the year. If you’re 50 or older in 2013, you can make catch-up contributions to a solo 401(k) of up to $5,500, for a maximum contribution of $56,500. Some solo 401(k)s also let you take out loans.
The maximum contribution for a SEP is the same as for a solo 401(k) — $51,000 for 2013 — but you are limited to contributing up to 20 percent of your net self-employment income. SEPs are usually easier to set up. You can open one at most brokerage firms, mutual fund companies or banks that offer IRAs, and you can usually invest in any mutual funds, stocks, bonds or other investments available in the firm’s IRAs. You can’t take loans from a SEP account.
Most people can set aside more money in a solo 401(k) plan than in a SEP. Say, for example, you earn $15,000 in net self-employment income from a freelance job for the year. You can contribute the full $15,000 to a solo 401(k), but you can only contribute $3,000 to a SEP (20 percent of $15,000).
You need to be careful with solo 401(k) limits if you have a 401(k) through an employer and also have some freelance earnings. In that case, your total employee deferrals to your employer’s plan and your solo 401(k) are limited to $17,500 for the year. But you can still contribute up to 20 percent of your net self-employment income to a solo 401(k).
For a list of solo 401(k) plan administrators, see the 401khelpcenter.com vendor list. When choosing the administrator, compare the investment choices and fees. Fidelity, Schwab (SCHW) and TD Ameritrade (AMTD), for example, have no set-up or maintenance fees and let people choose most investments that are available to brokerage customers.
For more information about your options, see IRS Publication 560, Retirement Plans for Small Business.
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- The 10 Best Cities for Early Retirement
- The 10 Most Tax-Friendly States for Retirees
- The 10 Least Tax-Friendly States for Retirees
Where you live can have a huge impact on your tax bill in ways that may surprise you. Some states are more tax-friendly for retirees than others — particularly if you are living on a fixed income — can have a big impact on how much you have left over to spend.
Click through our gallery to see which states qualify as “heaven” and which are “hell” for income tax, pension, social security benefits, sales tax and property tax.
Next: States With No Income Tax
Don’t assume that a state with no income tax qualifies as a tax haven. High sales and property taxes can more than offset the absence of an income tax.
7 States With No Income Tax
(N.H. and Tenn. tax only dividend interest income that exceeds certain limits.)
Next: Pensions – Tax Heavens
Only three states exempt virtually all retirement income (including public and private pension benefits, 401(k) and other retirement-plan distributions, and IRA withdrawals) from state income taxes.
3 Best States for Pensions
Next: Pensions – Tax Hells
Five states are particularly tough on retirees. Not only do they fully tax most pensions and other retirement income, but most of them also have fairly high top tax brackets.
5 Toughest States for Pensions
Next: Social Security Benefits – Tax Heavens
36 states and the District of Columbia don’t tax Social Security.
36 States That Are Heaven
Alabama, Alaska, Arizona, Arkansas, California, Delaware, Florida, Georgia, Hawaii, Idaho, Illinois, Indiana, Kentucky, Louisiana, Maine, Maryland, Massachusetts, Michigan, Mississippi, Nevada, New Hampshire, New Jersey, New York, North Carolina, Ohio, Oklahoma, Oregon, Pennsylvania, South Carolina, South Dakota, Tennessee, Texas, Virginia, Washington, Wisconsin and Wyoming
Next: Social Security Benefits – Tax Hells
The remaining 14 states tax Social Security benefits to some extent.
14 Tax Hells
Colorado, Connecticut, Iowa, Kansas, Minnesota, Missouri, Montana, Nebraska, New Mexico, North Dakota, Rhode Island, Utah, Vermont and West Virginia. (Iowa will gradually phase out its Social Security tax by 2014, starting in 2008)
Next: Sales Taxes – Tax Heavens
These five states have no state sales taxes.
Top 5 States
Next: Sales Taxes – Tax Hells
These five states each have a state sales tax of 7%, the highest in the nation.
5 Worst States
Next: Property Taxes – Tax Heavens
Based on data from a 2006 Census Bureau survey and Tax Foundation calculations these are the five states with the lowest median real estate taxes.
5 Best States for Propert Taxes
Next: Property Taxes – Tax Hells
At the other end of the spectrum, these five states have the highest median real estate taxes. (from highest to lowest according to 2006 Census Bureau survey and Tax Foundation)
5 Worst States
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