Retirement Plans for the Self-Employed

June 2003
by Tad Crawford and Kay Murray

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It is tempting to postpone the complex process of planning for retirement. But it’s not wise. No matter how far away the retirement years seem, or how attractive or repellent the thought of retirement is, it makes sense to start working toward it early. A good way to start is by thinking about the major, basic choices set forth below. Please note that our recommendations assume that you are a sole proprietor and not a partnership, corporation, or limited liability company, and that our suggestions are obviously not a substitute for the advice or services of a qualified tax advisor.

Keoghs & SEPs

A “Keogh” plan permits self-employed people to contribute to a retirement fund and deduct the amount of the contribution from their gross income when computing income taxes. The Keogh deduction is allowed in a given year only if you invest it in one of a specified kind of retirement funds, set forth in IRS Publication 560, Retirement Plans for Small Businesses. Even if you’re employed by a company with a retirement program, you might still be able to set up a tax deferred Keogh plan for your writing and self-publishing income. If you have employees, any retirement plan you set up for yourself will probably require contributions for their benefit.

There are several ways to determine the maximum amount of contributions you may make to a Keogh plan, which are limited by certain caps. As with other tax deferred retirement plans, contributions to a Keogh plan must be made before the filing date of the tax return (usually the following April 15). But unlike other plans, the Keogh plan itself must be set up during the tax year for which your deduction is taken. You must pay a tax penalty for withdrawing from the plan prior to age 59_ (unless you become permanently disabled), but no taxes are incurred on the growth of a Keogh fund until the funds are withdrawn. Distributions are taxed when made.

Keoghs are very good for the self-employed. Your tax bracket at retirement age could be much lower than it is while you’re working and making contributions to the funds, so paying income tax on the distributions will cost you less. The funds will have grown tax-free. If you create a trust to hold the Keogh, you can act as trustee and administer the investments. One-participant Keogh accounts of less than $100,000 are exempt from any annual filings. More information about Keogh plans can be obtained from the institutions that administer them.

A self-employed person may also create a Simplified Employee Pension (SEP), which cannot be as customized as Keogh plans can be. SEPs do not need to be set up by the end of the year for which the contribution is made and do not have the same annual filing requirements as some Keoghs. If you want to make the largest possible deductible contributions to your retirement funds, however, the Keogh is preferable to the SEP. IRS Publication 560, Retirement Plans for Small Business(SEP SIMPLE and Qualified Plans), helps explain the various plans in more detail.

Traditional IRAs

Separate from either a Keogh plan or a SEP, you may open a traditional IRA (Individual Retirement Account). Creating an IRA allows you to contribute into a retirement fund up to a certain amount per year (assuming that your wages and professional fees amount to at least that much).

To qualify to make deductible contributions to an IRA, you must either: (1) not be covered by another retirement plan, such as an employer-sponsored 401(k), Keogh, or SEP, or (2) if covered by another retirement plan, not exceed certain limits on adjusted gross income, which increase if you are married filing jointly.

The custodial fees charged by a plan administrator may be deducted as investment expenses on Schedule A if these fees are separately billed and paid. Commissions paid on transactions in your retirement fund are not deductible. Keogh, SEP, and IRA plan contributions are claimed on Form 1040. Check whether you must file additional forms with your plan’s administrator.

The Roth IRA

Regardless of your participation in other retirement plans, you may also establish and make nondeductible contributions to an individual retirement plan called a Roth IRA. To qualify as a Roth IRA, the account or annuity must be designated as such when it is set up, although you may convert to a traditional IRA to a Roth IRA (and back again) if you are willing to pay income tax on your original contributions to it.

Roth IRAs are generally subject to the same rules as traditional IRAs, except that you cannot deduct contributions to your Roth IRA. The great benefit of a Roth IRA is that it grows tax-free, and qualified distributions from it can be tax-free when they are made. You may withdraw your original contributions to it at any time without having to pay a tax or penalty (because by definition, you have already paid income tax on them). More information is available from institutions such as banks that administer Individual Retirement Accounts, as well as from IRS Publication 590, Individual Retirement Arrangements(IRAs).

For Medical Matters

You should also strongly consider setting up a Medical Savings Account, which is similar in operation to a traditional IRA. If you anticipate medical costs that will not be covered by your insurance, you can use this account for saving income tax-free to cover them. See IRS Publication 969, Medical Savings Accounts, for more details on this excellent new option.


Tad Crawford is an attorney, publisher at Allworth Press in New York City, and the author of “Business and Legal Forms for Authors and Self-Publishers.” Kay Murray is Assistant Director and General Counsel of the Authors Guild, Inc., the nation’s largest organization of published authors. This article is adapted from the revised Third Edition of “The Writer’s Legal Guide: An Authors Guild Desk Reference” by Tad Crawford and Kay Murray, available for $19.95 plus $5 shipping and handling (NY State residents must add sales tax). Order toll-free from 800/491-2808, by mail from Allworth Press, 10 East 23rd Street, New York, NY 10010, from the Authors Guild at 31 East 28th Street, New York, NY 10016, or via www.allworth.com. The book is free online to members of the Authors Guild.

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