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Posted by Thumper on October 8, 2007, 4:09 pm
wrote:
>Costas wrote:
>> First some background: I am a 27 year old sole proprietor of my own
>> business. I have no employees.
>>
>> So I'm trying to research retirement options and kind of stuck between
>> SEP and ROTH IRA's.
>
>I'll try to summarize, it's a big topic.
>
>As a sole-proprietor you can set up what amounts to an "employer"
>retirement plan. It's a bit of a fiction because you are really both the
>employer and employee, but it lets you tap into some good alternatives -
> meaning, you can set aside quite a bit of your money in a tax-deferred
>account.
>
>A SEP-IRA is one of those. You're able to defer, in effect, up to 20% of
>your sole-pro net income into an IRA. You won't pay income taxes on any
>amount you defer. The money can be invested in a wide range of
>investments -- mutual funds, stocks, bonds, depends on where you open
>the account -- and isn't taxed until you take it out at retirement. If
>you take it out earlier, you're hit with taxes as well as
>early-distribution penalties. But let's say you make $50k...you could
>set aside $10k of it (not exactly, see the worksheets for the exact
>calculation).
>
>These days many are using "solo-k" plans instead of SEPs -- 401(k) plans
>with only one owner/participant. The advantage is that you can defer a
>flat $15,000 in addition to the 20% "employer" contribution. These used
>to be very expensive but in the past few years they got a lot cheaper or
>even "free", though you may have fewer investment alternatives.
>
>You'll find some other alternatives out there, unfortunately "employer
>based" retirement plans are governed by a patchwork of tax laws so it's
>a bit confusing.
>
>Now forget all that for a moment...any individual with earned income can
>put money into an IRA, which is a tax-deferred account for retirement
>savings. The annual contribution limit is currently $4,000 so it's not
>as good as the employer-based alternatives. You have two basic
>alternatives, a Traditional IRA and a Roth IRA. See the MIFP FAQs for a
>discussion of the differences.
>http://financial-planning.algebra.com/Retirement_Savings_and_Planning
>
>Which to do depends on your current tax rate and how much you want to
>defer for retirement. You could do a combination of SEP-IRA or 401(k)
>plus a Roth IRA (if you qualify), or only one of these. Or if you only
>want to defer $4k or less, the Trad-IRA is a simple way to do it.
>
>-Tad
Of course one problem is that if you ever do get an employee, you must
contribute as much to the plan for them as you do for yourself in any
given year.
Thumper
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