Retirement Plans for the One-Person Companies

1. Solo 401(k)

1a. Salary Deferral Contribution
For businesses of this type, the salary deferral contribution is based on net adjusted business profit. Net adjusted business profit is calculated by taking gross self employment income and then subtracting business  expenses and then 1/2 of the self employment tax. In 2009 and 2010, 100% of net adjusted business profits income up to the maximum of $16,500 or $22,000 if age 50 or older can be contributed in salary deferrals into a Solo 401k.

1b. Profit Sharing Contribution
A profit sharing contribution can be made up to 20% of net adjusted businesses profits. Net adjusted business profit is calculated by taking gross self employment income and then subtracting business expenses and then 1/2 of the self employment tax.

• Advantage: borrowing permitted

2. Roth Solo 401(k)

• Contributions are after-tax.  Other provision are similar to the solo 401(k).
• Advantage:  Earnings and asset appreciation are tax-free.

3. Keogh

• Contribution:  Maximum contribution is $49,000.
• Disadvantage: Administration may be complex.

4. SEP-IRA

• Contribution:  If not incorporated, the maximum contribution is 20% of net business profit or $49,000.
• Contribution:  If incorporated, the maximum contribution is 25% of compensation or $49,000.
• Deadline: April 15 following the tax year.

5. SimpleIRA

• Contribution:  100% of income up to $11,500.
• Advantage:  Very easy to set up.
• Disadvantage: 25% penalty for withdrawal within 2 years of its inception.
• Deadline:  Must be setup by October 1 and funded by December 31.

Example computation of self-employment income

Reference: IRS Publication 560.