Four Retirement Plan Options for Independent Contractors

As an independent contractor, you are now responsible for all aspects of your business, to include your retirement plan. Whether you are a physician, attorney, consultant, or any other type of profession that can have independent contractor status, one of the first things that comes to mind is, “How do I get to keep more of what I make?”Thankfully, the tax code gives preferred treatment to those who plan ahead and make the decision to save for retirement. Here are four retirement plan options that are most often utilized by Independent Contractors.IRA / Roth IRA – This allows you to contribute of to $5,500 of earned income per year. Your spouse may also contribute, regardless of whether he/she had earned income. Contributions to this account are usually tax deductible, and grow tax deferred. Taxes are paid when you withdraw funds at or over age 59 ½. There is a $1,000 catch up provision for both IRA and Roth if you are age 50 or older, and Roth contributions are made with after tax funds, but grow tax free.Solo 401(k) / Roth 401(k) – A Solo 401(k) allows you to make contributions by you the employee and you the employer. Employee contributions are payroll deferral of up to 100% of compensation (up to $18,000). These contributions can be either before tax, or after tax. If you decide this is after tax, this is deposited into a Roth 401(k). Employer contributions are not mandatory, and are always pre-tax up to 25% of your compensation. There are some additional items to consider if you are not set up on payroll, so consult with a professional before you establish this type of plan. There is a catch up provision for an additional $6,000 of employee deferral if you are age 50 or over. SEP IRA – The SEP IRA is the least complicated type of retirement plan for an independent contractor. Simply put, you can save, pre-tax, an amount up to $54,000 or 25% of your compensation. (This amount is 20% if you are not incorporated.) The contribution is an expense to your business and is not subject to self-employment tax.Defined Benefit Plan / Cash Balance Plan – The Defined Benefit Plan, or Cash Balance Plan as it is often referred, is the most complex of the plans available to an independent contractor, but it affords the greatest amount of tax deferred savings. This plan enables you to accumulate up to $3,000,000 by your retirement age. Regardless of your profession, as an independent contractor, there are various retirement plan options that can benefit you. The tax benefits will vary based on income and plan types, so be sure to explore all options to determine which benefits you most.