Retirement Plans for the Self-Employed

The total contribution can't exceed $42,000 for 2005 and the plan must be established by Dec. 31 to qualify for this year, reminds O'Donnell.

In addition, there are no set-up or annual maintenance fees. The only drawback is that once your plan's assets exceed $100,000, you'll have to file a Form 5500, Annual Return/Report of Employee Benefit Plan, with the IRS. And just like any other 401(k), you can't withdraw the money before reaching 59-and-a-half without a penalty.

The World of IRAs

If you're thinking you'll never have an extra $42,000 to stash away, consider an IRA for now. There are two basic choices for self-employed folks.

If it's just you or you have a few employees, the SEP-IRA or Simplified Employee Pension could work. You can contribute up to 20% of your net earnings to a maximum of $42,000. So that could mean a potential $42,000 deduction on your business tax return, if you had the money.

And this IRA doesn't have to be established until the time your file your tax return -- including extensions. So if you put your 2004 tax return on extension again and it's now due on Oct. 15, you could still set up a SEP-IRA for 2004 and make a qualifying contribution.

There are no real administrative responsibilities here, but remember that you'll get hit with a 10% penalty if you try to withdraw the money before age 59-and-a-half.

But run the numbers because you may still be better off with a solo 401(k). Let's say your net earnings are around $75,000 a year. With a SEP-IRA, your deductible contribution will max out at 20%, or $15,000. But with the solo 401(k), you can first defer the $14,000, then contribute the 20%, or $15,000, on top of that.

So you just put away $29,000 with the solo 401(k) vs. $15,000 with the SEP-IRA. "If you have the money, it makes no sense to have an IRA, you might as well do a solo 401(k)," says Fooden.