Retirement Plans for the Self-Employed

Of course, you'll owe taxes on the money when you start to withdraw at retirement. The bigger issue, however, is that you need to commit. Once your actuary determines how much you need to put away each year, it's written in stone. For example, if you agree to put $50,000 in your plan each year but in 2007, your business has a bad year, you still have to come up with the contribution amount or the IRS will penalize you, says Fooden.

If before year-end you realize that you're never going to make your contribution number, you can file paperwork with the IRS and ask to have the plan suspended for the year. As long as that's all done by Dec. 31, you'll be excused from making your contribution to the plan.

So while it's a great option for someone who hasn't started to save much yet and can now afford to, it could be an administrative headache if you don't consistently have the money.

If you think a defined benefit plan could work for you, Pioneer Investment's Uni-DB is a good place to start your investigation.

Solo 401(k)

If you're afraid of commitment, as many of us are, the solo 401(k) plan might be a better solution. It resembles corporate America's 401(k) except that you can contribute more money.

Your total contribution to a solo 401(k), a.k.a. self-employed 401(k), can't exceed $42,000 for 2005 ($46,000 for people age 50 and over). That's a big difference from the corporate folks, whose max for 2005 is $14,000 ($18,000 for the 50 and up crowd).

Here's why. As a self-employed person, you can have $14,000 withheld from your paycheck, just like any other employee. But then, as the employer of a self-employed business, you can contribute another 20% of your net self-employed income. For instance, if you make $140,000, you can contribute another $28,000 to the solo 401(k) plan. That would bring you to the total $42,000 for the year.