In addition to the Roth or traditional IRA limit of $2,000 per year, self-employed individuals and small business owners can also have a retirement plan that may allow them to invest a significant portion of their income. Since Social Security will likely cover only a small percentage of living expenses after you retire, contributing to a small business plan is an excellent way to bridge the gap between retirement expenses and retirement income. There are a variety of plans to choose from according to your needs and business situation, and each allows for tax-deductible contributions and tax-deferred growth. The plans available to small business owners and self-employed individuals include the SEP IRA, SIMPLE plans, Profit Sharing/Money Purchase Plans (often referred to as a "Keogh" in the investment industry), and in some cases, 401k plans.

A retirement plan provides many benefits for both you as well as your employees, if applicable. You do not need to have employees or be incorporated to adopt a retirement plan. However, if you do have employees, retirement plans can be a tremendous incentive to attract and retain employees, while at the same time, allow you significant tax savings. Contributions you make to a retirement plan for your employees are generally deductible as a business expense. Any investment earnings are not taxed until withdrawn at retirement. This tax-deferred compounding allows you to accumulate substantially more than you would in a similar taxable investment.

As noted above, there are a variety of retirement plans available to self-employed individuals and small business owners, but they generally fall into two main categories: plans funded solely by the employer, and plans funded by a combination of employee and employer contributions. Plans funded only by the employer include SEP IRA's and Keoghs, where the employer contributes the same percentage of each participant's compensation as he contributes for himself. In SIMPLE plans (which stands for Savings Incentive Match Plan for Employees) and 401k plans, employees have the opportunity to defer part of their compensation on a pre-tax basis, generally with a small employer match. The various plans have different rules regarding contribution limits, employee eligibility, reporting requirements, and plan continuity, to name a few. The following information should help you compare the plans and get you started on deciding which plan might be right for you and your business.

SEP IRA
Of all the plans available to self-employed individuals and small businesses, the SEP (Simplified Employee Pension) is the easiest plan to administer and maintain from year to year. In fact, it is often referred to as a year-by-year plan. You can contribute from zero to 15% of compensation, up to a maximum of $25,500. The percentage of compensation can be varied each year, or you can even skip a year of contributions if you want to. SEPs are commonly used by sole proprietors, partnerships, and businesses with a small number of full-time or part-time employees. The business can be either incorporated or unincorporated. They do not require the employer to do any additional tax filings with the IRS.

Keoghs
A Keogh should be considered if you want to contribute a greater percentage of your income and do not necessarily need the flexibility that a SEP allows. Keoghs have a higher limit of up to 25% of compensation or $30,000, whichever is less. Keoghs can also be used by sole proprietors, partnerships, and incorporated or unincorporated businesses with a small number of employees. There are actually three different options in establishing a Keogh: a Profit Sharing Plan, a Money Purchase Plan, and a Paired Plan, which combines Profit Sharing and Money Purchase Plans. These options establish how much you can contribute to each plan, as well as whether or not you are required to contribute on an annual basis. A Profit Sharing Plan has the same contribution limits as a SEP and similar flexibility. A Money Purchase Plan allows you to contribute the highest percentage of compensation each year, up to 25% of income or $30,000 per participant, but with this plan you must make a contribution each year based on the fixed annual percentage you elect when you set up the plan. A Paired Plan allows the maximum annual tax deduction while providing some flexibility. For example, you can contribute a fixed annual contribution of 10% to a Money Purchase Plan, and have the flexibility of contributing up to 15% to a Profit Sharing Plan, with the overall $30,000 limit. In this example, in "good" business years you can contribute the maximum amount, while if business needs dictate, you are only required to contribute 10% to the Money Purchase Plan. Also like the SEP, the Keogh requires you contribute the same percentage of each eligible employee's compensation as you contribute for yourself. However, Keogh plans generally require more administration than a SEP, such as filing the 5500 forms with the IRS each year.

SIMPLE Plans
Because SIMPLE plans can shift some of the responsibility of saving for retirement from the employer to the employee, they are often more attractive to larger companies. They can be established by small businesses with 100 or fewer eligible employees, and include two plan options: the SIMPLE IRA and the SIMPLE 401k. These plans have similar features, but at this time we will focus on the SIMPLE IRA. Eligible employees (including sole proprietors who would act as both employee and employer for the purposes of this plan) can defer up to $6,000 of their salary. While employers must also make contributions to their employees' accounts, it is generally a much smaller obligation than a SEP or Keogh would require. Employers have the option to make either a matching contribution (usually 1% to 3% of the participant's compensation), or a non-elective contribution equal to 2% of each eligible employee's income, regardless of whether the employee has chosen to contribute to the plan. The SIMPLE IRA does not require the employer to file any annual reports with the IRS or complete any complex testing to ensure there is no discrimination favoring highly compensated employees. However, administratively it may be somewhat more involved than a SEP due to frequent payroll deductions and IRS deadlines to submit employees' deferrals.

401k Plans
Like a SIMPLE IRA, a 401k allows employees to defer a portion of their compensation to a retirement plan on a pre-tax basis. However, it might not require an employer contribution, although many employers do match a percentage of employee deferrals to encourage participation and to attract and retain skilled employees. Some 401k plans include vesting schedules and loan provisions for employees. With more features for the employees, and greater administrative responsibilities for the employer (such as IRS 5500 filings and discrimination testing), 401k plans tend to be more costly and are usually more appropriate for companies with over 25 employees.

Most retirement plans have notification requirements you will need to be aware of for your employees, and various deadlines for establishing and funding the plans. It is also important to realize that while a retirement plan for your business could affect the deductibility of a traditional IRA contribution, it does not prohibit you from contributing to either a non-deductible IRA, or a Roth IRA, as long as your income is not above the IRS guidelines for the Roth.

Considering the tax savings you will realize and the benefits you will bring either to your company or for your own retirement, researching your options and adopting a plan for your company will be well worth your time.