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Self Employment Retirement Plans

by Jeff Beck

When you're a self employed contract pilot, you tend to wear a lot of hats; too many sometimes. With the myriad of tasks facing the small business owner, it’s a wonder they find the time for everything. One of the things that tends to get overlooked is retirement planning. It's too bad too because being self employed affords you some advantages not enjoyed by the average person.

There are a few types of retirement plans for the self employed. The contribution limits vary, and you should contact your CPA for up-to-date advice, but by implementing a combination of different retirement plans, you can contribute a basically (for all but the most successful business owners) unlimited amount. Here is a quick outline on the different retirement plans for those of you who are self employed.

Keogh Plan

Your friend at Boeing, GM or CitiCorp has a corporate pension plan, you’ve got a Keogh. This is the small business owner’s answer to a corporate pension plan. Set up the plan by the end of the calendar year to be eligible, but you can actually defer the funding until the filing of the tax return, as long as the plan was in place by Dec. 31^st of the tax year. Contributions are either based on a profit sharing plan, or as with many large, corporate pension plans, designed as a defined benefit plan. The latter must be set up using an actuary and the contribution will be such that you reach the target benefit, up to $180K, in the remaining number of years until the payout begins. The profit sharing version of the Keogh Plan allows an annual contribution of up to $45,000 (for 2007) and are based upon a percentage of your business’s profit or your compensation.

Solo 401(k)

This is the version of the venerable plan for those of you that have taken the entrepreneurial plunge. The solo 401(k) let’s you contribute up to $15,500 this year, unless you’re a half centurian, then you can boost that to $20,500. You can add to that up to 20% of your income (sole proprietor) or 25% (corporate compensation) as well. The obvious benefit to the solo 401(k) is that you can contribute the same percentage as you can with a traditional retirement plan, such as a Keogh, then spice it up a bit with an additional $15 or $20K.

For those of you with yourself as the only employee, you’re as good as gold. There'll be only a little paperwork involved to get everything rolling. As with the Keogh, you must be ready to go, with everything filed by December 31^st, if you want it to count for the current year. If you do have other employees, you'll probably be required to offer a contribution to them as well. Talk to your plan administrator about this if you already have one, or find a good financial consultant who is versed in self employed retirement issues and how they affect your specific business and employees.

Simplified Retirement Plans (SEP)

Ah, the SEP. SEPs are super easy and you can contribute up to the same $45,000 limit as with the Keogh Plan, using the same percentage guidelines as with the Solo 401(k). Call your bank, they can get you going with a SEP pretty darn fast. If you wait too long, it's not a big deal, as long as you get everything handled by the time you file your taxes. The really cool thing is that you can even wait that long if you've filed an extension. Pretty cool, huh?

Don't miss out on proper retirement planning if you're an independent contract pilot. You can still have your Roth IRA with these other plans, but you shouldn't have only your Roth. The beauty is that you can enjoy substantial tax breaks and fund your plan with substantial dollars. Retirement could be sooner than you thought.