The best retirement plans for the self-employed

Q. What’s the best retirement plan for self-employed people? I’m starting a new business and I will be the only employee.
— Getting started

A. You’ve got a lot of options.

The best choice for you will depend on your needs and your tax situation, so it’s smart to enlist the help of a tax professional or certified financial planner.

Here are some thoughts to get you started.

If you’re on your own and you want flexibility in terms of how much you want to contribute, start by considering a Traditional IRA, said Anthony Vignier, a certified financial planner and attorney with Vignier Investment Group in Kearny.

In 2016, you can contribute $5,500 plus $1,000 catch-up contribution if you’re over 50, he said. The contribution is tax-deductible and you can start withdrawing the funds at age 59½, at which time the withdrawals are taxed as income.

“Another option is a Roth IRA, which is similar to a Traditional IRA but does have income limits and does not offer an immediate deduction but after age 59½, but the Roth does provide for tax-free withdrawals,” he said.

If you can set aside more money, consider a SEP-IRA.

“The contribution limits are up to 25 percent of compensation or $53,000, whichever is less,” Vignier said. “The IRS has a worksheet to determine what portion of your contributions is tax deductible.”

Vignier said a SEP functions like traditional IRA in that distributions in retirement are taxed as income, and there is no Roth version of a SEP-IRA.

Another option is the Solo 401(k).

While fairly easy to set up, it is more paperwork intensive than the other two options.

“You’ll need to file paperwork with the IRS each year once you have more than $250,000 in your account,” Vignier said.

The contribution limits are $53,000 per year (plus $6,000 catch-up contribution for those 50 or older) or 100 percent of earned income, whichever is less, he said.

This plan allows you to contribute as both an employee and as the employer, with salary deferrals of up to $18,000 in 2016 (plus that $6,000 catch-up contribution, if eligible). In addition, you can add approximately 20 percent of net self-employment income, not exceeding the limit. Contributions are pre-tax, and distributions after age 59½ are taxed.

There is also a Roth solo 401(k) option.

“You can’t contribute to a solo 401(k) if you have employees,” Vignier said. “But you can hire your spouse so they can contribute to the plan.”

He said your spouse can contribute up to the standard employee 401(k) limit, plus you can add employer contributions for a total of up to $53,000, plus catch-up contribution, if eligible.

“This effectively doubles what you can save,” he said.

Email your questions to ask@njmoneyhelp.com.

Karin Price Mueller writes the Bamboozled column for The Star-Ledger and she’s the founder of NJMoneyHelp.com. Click here to sign up for the NJMoneyHelp.com weekly e-newsletter. Like NJMoneyHelp.com on Facebook and follow it on Twitter.