The Bottom Line: Special IRAs for the Self-Employed
Complex employer retirement plans such as 401(k)s and 403(b)s are too expensive for self-employed individuals or small employers to create. Special IRAs with higher contribution limits are available to this group. They all follow the same rules as traditional IRAs, except their contribution limits are higher and they must be established by the small business or can only accept contributions from your self-employment income.
The Simplified Employee Pension, or SEP, IRA receives contributions from the employer, not the employee. This will work fine if you are self-employed without employees because you're making contributions for yourself. All the same traditional IRA rules apply, but you can contribute up to 25 percent of your self-employment compensation up to a specified limit, which adjusts annually. Check
Your SEP IRA account can be established up to the time you file your taxes.
A Savings Incentive Match Plan for Employees, or SIMPLE, IRA plan might be a better option if you have a small business with employees. Employees contribute to SIMPLE plans themselves, and then the employer makes a matching contribution. SIMPLE plans need to be established by October 1st of the year before you want to contribute. Employees can contribute 100 percent of their pay, up to a maximum of $10,500 annually if they are less than 50 years old, or $13,000 if they are over 50. This limit increases with inflation; check
If you are self-employed without employees and you're anxious to contribute as much as you can to a tax-deductible retirement plan, a single-person 401(k) might be your best option. Single-person 401(k)s have higher contribution limits than SIMPLE and SEP IRAs. All the same rules apply as to a regular 401(k), but since you're the only one using the plan, the reporting and administrative costs are reduced. If you're planning to stay on your own and not hire employees, this may be the best option.