Retirement Saving Options For Business Owners

If you are a business owner, you have additional ways to save for retirement. Here are some details on the best self-employed retirement plan options for small business owners based on the 2008 tax rules.

Simplified employee pensions (SEP) are generic retirement plans that allow you to contribute and deduct up to 20% of self-employment income (25% of salary if you're an employee of your own corporation). It literally takes only minutes to get one started, usually with no charge from a brokerage firm. They are just as easy as deductible IRAs, but they allow much bigger contributions.

Solo 401(k) is the next best option to a SEP and you can contribute up to 100% of the first $15,500 of your 2008 compensation or self-employment income ($20,500 if you'll be 50 or older at year-end). On top of that, you can contribute and deduct an additional amount of up to 25% of your compensation income, or 20% of your self-employment income.

Roth IRA can be set up along with a SEP or Solo 401(k) to get an additional retirement tax break. Contributions are nondeductible, but earnings build up tax-free and you can eventually take out all your money without owing Uncle Sam a dime. For 2008, contributions up to $5,000 are allowed ($10,000 for couples), subject to phaseout between adjusted gross income of $101,000 and $116,000 for singles ($159,000 and $169,000 for joint filers). So you can contribute the max to your SEP or Solo 401(k) and then contribute an additional $5,000 into a Roth IRA. You can contribute an additional $1,000 if you will be 50 or older at year end. So can your spouse if he or she passes the age test.

Spousal Deductible IRA is a poor stepchild to other self-employed retirement-plan choices, you should know one thing: If your spouse contributes to a retirement plan at work but you do not, you can contribute $5,000 for 2008 ($6,000 if you will be age 50 or older at year-end) to a spousal deductible IRA, as long as your joint AGI is below $159,000. (The deduction is phased out between AGI of $159,000 and $169,000.) While this is all well and good, contributing to a Roth IRA may save more taxes in the long run.

If your business has employees, a SEP, or Solo 401(k) generally must cover them as well — meaning you'll probably have to make contributions that don't just benefit yourself. All employee SEP contributions are immediately 100% vested.