Dear Liz: I’m 50 and self-employed. I am trying to save as much as possible for retirement. I’ve put the maximum allowable in my IRA ($6,000). What else can I do? Would contributing to a Roth at this age be advisable? What other options are out there?
Answer: You’re lucky — you actually have more options to save for retirement than people who don’t own their businesses, if you can spare the cash to make significant contributions.
You can contribute up to $14,000 annually to a SIMPLE IRA (the limit is $11,500 for people under 50). Another option is a simplified employee pension, or SEP. You can contribute as much as 20% of your net business profit or 25% of your salary (if you pay yourself with a W-2) to a maximum of $49,000 in 2011. For more details on SIMPLEs and SEPs, see IRS Publication 590.
If you want to contribute more than the SIMPLE’s $14,000 limit but a SEP won’t allow you to put aside enough, you can contribute a greater percentage of your income to a solo 401(k) or a solo Roth 401(k). With these plans, you can contribute 100% of your first $22,000 in income from the business (or $16,500 if you’re under 50), plus 20% of net profit, until you hit the $54,400 maximum for those 50 and older ($49,000 is the maximum for younger people). Your contribution to a solo 401(k) would be tax deductible, while your contribution to a Roth 401(k) would not be, but your withdrawals in retirement would be tax free.
If you’re really taking in the dough, consider a traditional, defined-benefit pension plan. These plans can cost thousands of dollars to set up and administer, but you can put aside hundreds of thousands of dollars a year.
You can take advantage of any of these options and contribute an additional $6,000 to a Roth IRA. (You can’t, however, contribute $6,000 each to both a traditional IRA and a Roth IRA; the limit for both accounts combined is $6,000.) Having at least some money in a tax-free retirement bucket can give you more flexibility to control your tax bill in retirement.
You’ll probably want a tax professional’s advice, since retirement can be a complex area to navigate.