There are three popular retirement plans for self-employed people: the SEP-IRA, SIMPLE IRA and solo 401(k) plans. These plans differ according to the rules governing them, and the right plan depends on how much an individual wants to contribute and whether the concerned individual has, or plans to have, employees.
IRA stands for individual retirement account, and SEP stands for self-employed pension. A SEP-IRA is a self-employed pension individual retirement account that is governed by the Internal Revenue Service. This plan is typically recommended for entrepreneurs who have no employees. With SEP-IRA, a business owner can contribute 25 percent of earned income up to a stated annual maximum, which for 2014 is $52,000.
SIMPLE stands for savings incentive match plan for employees, and a SIMPLE IRA is a retirement plan specifically targeted to small businesses and self-employed individuals. This plan is simple to administrate and has low administration fees. However, it is not ideal for fledgling businesses with employees, as the employer is liable to match employee contributions to a retirement plan with a cap of 3 percent of the employee's salary. The other alternative is to contribute an amount equal to 2 percent of the salary towards a qualifying plan, even if the employee is not contributing.
The solo 401(k) is a simplified version of the traditional 401k that is designed for self-employed individuals. Under this plan, individuals can set aside a certain portion of their annual salaries up to a certain amount for retirement. For 2014, the amount is $17,500. In addition, they can contribute up to 25 percent of their profit share towards their retirement. There is, however, a maximum dollar amount for the profit share that is set every year; for 2014, this amount is $52,000.