In order to qualify for these three retirement accounts, your earinings must be reported on Form 1099-misc., or be earned as fees for services you've provided. (Company employees, on the other hand, are usually provided with W2s to report money they've earned.) If you have people working for you, after a certain period of time you'll have to open one for them as well.
Simplified Employee Pension Plan (SEP)
With this plan, you can put away 13.035 percent of your income or $20,870 -- whichever is less -- per year in payments for yourself. SEP-IRAs can be set up at banks, mutual fund companies, brokerage firms, discount brokerage firms, anywhere you'd like to invest. If you have employees who have worked for you three out of the past five years, you have to put money, the lesser of 15% or $24,000, in their SEPs as well.
Keogh
This plan is a bit more complicated than the SEP, but allows you to put away more money. You must also fund anyone who has worked for you at least one year. And you must contribute the same percentage for those who work for you as you do for yourself. Keoghs are divided into two types of plans the money purchase plan and the profit-sharing plan.
Money Purchase Plan -- With this plan, you can put away the lesser of 20 percent or $30,000 of your net earnings for the year. When you open the account the set percentage, up to 20%, is up to you. The only problem is, the percentage you set cannot be changed. If you're not having a great year, you still have to make the same percentage contribution to your account.
Profit Sharing Plan -- With this plan you have more flexibility. You can put away the lesser of 13.043% or $30,000.
You can combine the two so that you can get the most of what you want to put away in your account without feeling obligated.
SIMPLEThis plan lets you put up to $6,000 a year into a plan for yourself. If you have any employees who have worked fo you and have made at least $5,000 in compensation over the past two years and are projected to do it again, they are eligible for a SIMPLE too. As a self-employed person with employees who are eligible, you are required to follow one of two contribution formulas, the matching contribution or the 2 percent formula.
Matching contribution formula -- You must match dollar for dollar what the employee puts into it, from 1% up to 3%, of their own compensation. You get to decide. However, if you choose the lower match, you cannot do so for more than two out of five years.
The 2 percent contribution formula -- You decide that you are going to contribute 2% of the employees' compensation, up to a maximum of $3000 a year for each employee.
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