Guru,

I am self-employed, what is a better choice of pension contribution an IRA, 401k or a SEP plan?

Dear Mike,

If you are seeking maximum contribution and attempting to save maximum taxes and you are self-employed, then I would recommend you choose either 401k or SEP plan.

Firstly, the IRA limits you to $5,000 maximum contribution for each spouse, ie $10,000 per year, however, this assumes that your income does not exceed certain income limitations and that you are not participating in a qualified pension plan at your work place.

Secondly, if you are a single member LLC or a sole owner/employee I would suggest you go for the SEP plan. This is a simple plan and requires minimum paperwork, maintenance and provides you with a plenty of flexibility.

Consider a UNI-k plan that allows you to put away $44,000 as if you a the sole employer/+spouse in your business. You can invest a maximum of 25% upto $44,000 for each Spouse. Hence, net profit should exceed $320,000 in order to contribute $44,000 for each spouse.

The 401k is good if you have several employees and you can establish eligibility and percentage contribution for each plan. There are several variations of this plan, so please consult a pension expert to establish the best plan design for your company.

Regards
TaxGuru