What's the Best Retirement Plan for Independent Consultants?
Before writing How To Setup Your Own Software Development Company, I sent my Financial Planner the following e-mail.
I'm writing up a blog post on how to setup a Software Development Company for consultants and wanted to see what retirement plan I have. I'd like to recommend it (or others, if there's better deals). Do you have the name and a 2-3 sentence description?
Below is his response:
You have a SEP IRA but depending on how much they make and their savings objective they may also want an Individual 401K and/or Defined Benefit Plan.
A SEP IRA allows you to set aside up to 20% of your income after business expenses, up to $49,000 for those with income of $245,000 or more in 2009. An Individual 401K allows you to save a higher percentage of your income depending on your age and income. If you are under age 50 you are able to save $16,500 so long as your income is at least $16,500 (plus FICA, etc) and $22,000 for those over age 55. You are also able to set aside profit sharing and matching contributions in a 401K Plan. Those under age 50 have a maximum of $49,000 while those over age 50 have an increased limit of $54,000. Finally, for those who wish to save more, you could establish a Defined Benefit Plan and make contributions based on your age and income that total potentially more than $200,000 per year. If you establish a Defined Benefit Plan you are still able to have an Individual 401K Plan but the limits are the employee contribution amount ($16,500 or $22,000) plus 6% of your income up to $245,000 (another $14,700) for a combined total that could be well over $200,000 depending on your age and income.
There is always the Roth and Traditional IRA but those are very basic planning tools - they should still be used and considered but everyone should be familiar with them. 2009 allows $5,000 deposit for under age 50 and $6,000 for over age 50. Roth contributions are limited starting at $105,000 if filing single and $166,000 if married filing joint.
Of course, a perk of working for a company with benefits is they sometimes do 401K matching. However, I'd expect many company to be cutting back on that in this economy. If you're an independent consultant, do you have a retirement plan? Do you think you're doing as well as you could if you were a full-time employee?