Funding a nest egg

James Jaillet | April 02, 2011

Mary Beth Franklin, of Kiplinger’s Personal Finance magazine, says owner-operators, because they are self-employed, have more flexibility in choosing retirement account options. “You can set up your own account and save substantially more than employees can,” she says.

Individual 401(k) accounts allow an owner-operator to set up a retirement account and save much more than with an IRA, Franklin says. Individual 401(k) accounts, also known as Single-Owner 401(k) accounts, offer the same tax deferral benefits as traditional IRAs. Contribution limits are based on income, says Dennis Bridges, accountant at the eTruckerTax firm, and about 20 percent of net income can be contributed to an Individual 401(k) account each year. Like a traditional IRA, taxes are paid at withdrawal, including taxes on dividends and other growth.

Roth 401(k) accounts require that taxes are paid on contributions in the year in which they are earned. As with a Roth IRA, when the money is withdrawn, including its appreciation, none of it is taxable. Contributions for Roth 401(k) accounts are the same as Individual 401(k) accounts  — about 20 percent of net income.

SEP IRA refers to Simplified Employment Pension plans, which are similar to Individual 401(k) accounts, Bridges says, in that contribution limits are based on income and taxes are avoided until money is withdrawn from the account. Unlike 401(k) accounts, money can’t be borrowed from SEP IRAs, but the startup fees are less than those for starting a 401(k).


How to open a retirement account

An individual retirement account or an individual 401(k) account can be funded with mutual funds, stocks, bonds or cash. If you have a stock broker, he or she can help you start an account. Otherwise, see your banker or financial adviser, or search online for mutual fund families that offer accounts.

Once you have an account, consider an automatic monthly draft, even if it’s very small, from your checking account to the retirement account. This will ensure steady growth and relieve you of having to make repeated deposits.