Effective retirement planning for solo entrepreneurs

But which one should you chose? Here are a few examples of the sort of retirement plans on offer to small businesses and sole traders:

Roth IRA: These aren't specifically designed for sole traders but Roth IRA should be one of the first things you consider when making your retirement plans. They are very good value and very flexible. As long as you stick to the rules on distribution your money will grow without attracting tax. You can make contributions up to a maximum of $4,000 and you can make withdrawals any time you like with no penalty or tax. Check on the conditions for withdrawals, there may be a lower age limit for example.

SEP IRA: If the Roth IRA is proving too limited for what you feel you need to save then you might want to consider a SEP IRA. These permit you to invest a maximum of 25% of you income (20% if you're self-employed) up to a maximum limit of $44,000 a year. The contributions are deductible against tax and these schemes don't make large administration charges. You can also set up SEPs for employees, although they are not allowed to add their own contributions, and if you only have a small workforce it's a worthwhile benefit to offer your staff.

A Simple IRA: This is very similar to a 401K but the reporting requirements to the IRS are less onerous. The annual contribution limit is $10,000 and employers can match up to 3% of this. As with SEPs, you can deduct contributions against tax and the fees are very low. If you set a Simple IRA up for your employees there must be company matched contributions. If your income is not high, a Simple IRA is the plan that allows you to put aside the most towards your retirement.

Solo 401K: Sole traders can save the most using a solo-401K. The costs are low and reporting requirements are less than for the usual 401K. Like the SEP IRA, the maximum annual contribution is $44,000. Unlike the SEP IRA however, you can save all of the first $15,000 you earn. After that, you can contribute as much as a quarter of your income. If you think your business will take on employees then you shouldn't be considering a Solo 401K.

No pension planning is simple and you should be prepared to put in a bit of your own research or seek the advice of a professional. There are so many variable factors to consider: do you have employees, are you likely to take on employees; how much can you afford to put aside and how much can you pay to have the fund administered on your behalf?