As a sole proprietorship or self-employed entrepreneur, you should always look for ways to save money and avoid taxes. The two most advantageous plans are a SEP IRA and a single 401K. These plans allow for large contributions to tax-deferred accounts that will prepare you for the future and lower your current taxes. The account that works best for you will depend on how your business is set up and if you have employees.
A SEP-IRA is a simplified employee pension that allows business owners an easy way to contribute to their individual retirement account and that of their employees. A SEP is similar to an individual IRA and allows the same investments, stocks, bonds, mutual funds, and annuities, to name a few. To open a SEP, you will need to complete an IRS-approved SEP prototype plan, which will be provided by the institution with which you are opening the account, a bank, investment firm, or insurance company. All employees who meet the following criteria are eligible: They are at least 21 years old, have earned more than $ 550 in the fiscal year, and have worked for the company for at least 3 of the last 5 years. You can use lower standards, like 18 years or 6 months of service, they just can’t be more restrictive. The most important reason for opening a SEP account is the amount of money that can be contributed to the account. The limits are the lesser of the following: 25% of the employee’s compensation or $ 51,000 for 2013. Now, an employer must give the same percentage of contributions to each employee as himself. For example, if the employer gives himself a 20% contribution, he must give all eligible employees a 20% contribution.
A single 401K is an IRS-approved 401K plan designed for the self-employed or sole proprietor-employee corporations. To qualify for a solo 401K, you must meet the following eligibility requirements: presence of self-employment activity and no other full-time employees. To open an account, you will need a prototype approved by the IRS, this will be provided by the financial institution and you can buy the same investments as a regular IRA and you can also buy real estate, a great advantage. The advantage of a single 401K is that it allows for large contributions and you can also borrow money against the account. You can borrow up to 50% of the account value or $ 50,000, whichever is less tax-free for any reason. This is a great feature and allows flexibility for you and your business. For 2013, the contribution limits are $ 17,500 salary deferral and the business can contribute up to 20% of the year’s earnings for a total of $ 51,000, including salary deferral.