Matt RaibleMatt Raible is a Web Developer and Java Champion. Connect with him on LinkedIn.

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Over 10 years ago, I wrote my first blog post. Since then, I've authored books, had kids, traveled the world, found Trish and blogged about it all.

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?

Posted in Java at Feb 13 2009, 01:44:52 PM MST 8 Comments

How about this. Avoid paying into Social Security or Medi-whatever-it-is because there's very little chance that those programs will be solvent by the time anyone 40 or under is ready to retire and simply save that money for yourself.

Posted by Country on February 13, 2009 at 09:49 PM MST #

Here's a pretty good write-up on the differences b/n a SEP and Solo 401K (although a couple of years old):

For me, I don't put enough away to justify the extra paperwork and fees of a solo 401k....the 25% of my salary limit of a SEP are plenty. I guess if you were going to tuck an extra $16K somehow it might make sense.

Posted by Jason A on February 14, 2009 at 04:59 AM MST #

Great topic. I worked as an indie for 9+ years and never put anything away. Of course I had fun, but regret losing the opportunity to finance my retirement.

Of course I love my work so all is not lost. However if I could have done it again...

Love Groovy/Grails. Speaking about it at the next Chicago Groovy User Group. Gonna wear my old hippie clothes. Well, would, if they still fit.

Must hike with you next me I am in CO. Love the mountains.



Posted by Eric Weimer on February 14, 2009 at 07:14 AM MST #

Great post...

I dunno why but somehow it seems as if every interdependent business owner I know who is in the web/design sphere has the same issues without any relation to where they are located on the face of the globe.

I was in your position a few years back and despite the fact that my head spins when I look at numbers (...or perhaps it's because of this), I realized that I was doing next to nothing for my future, and so despite the satisfaction and pure joy of being self employed I made a conscious decision to "work for the man", at least for a while.

Now that I am an expecting father I'm kinda happy I made the choice I made but I'll be lying if I deny that I sometimes miss the carefree days of self employment.

"I tweet @pop_art"

PS I guess it all boils down to what your priorities are - but I'm guessing everybody already knows that...

Posted by Mike Darnell on February 16, 2009 at 02:04 PM MST #

Yep, SEP is the way to go and hopefully you invest wisely that you didn't get burn with the recent down turn. 401K sometime is very restricted and structure (limited by number of funds). The best retirement is the one with pension fund + 401K like the Fed. I don't any company still has pension option available.

Posted by Kiet Ly on February 17, 2009 at 02:39 PM MST #

Could you also comment on the topic: "What's the Best Life Insurance Plan for Independent Consultants?" thanks!

Posted by Alex B. on February 25, 2009 at 09:40 PM MST #

I have a SIMPLE-IRA, and I'm suprised that your financial planner didn't mention it. It's super easy to administer. The downside is that you're limited to contributing--only 11,500 salary deferral and 3% company match are allowed in 2009. I set mine up at Vanguard quite easily and it only costs me $25/year per fund.

If you make bank, then a SEP or other plan with higher pretax limits makes sense, but if you haven't started yet and are worried about maintenance costs, a SIMPLE-IRA may be worth a look.

Posted by Dan Moore on March 03, 2009 at 06:30 PM MST #

I operate as sole proprietor and , I got a solo 401k , was pretty easy to setup and there is virtually no paperwork. (I use fidelity). I can invest in any funds and or stocks

Posted by Stephane V on March 05, 2009 at 09:50 PM MST #

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