Why IRA Contribution Indexing Is a Boon to the Self Employed

images courtesy of Tax Credits via Flickr

Millions of small businesses in the US are owned by people who need to invest for their future but who don’t have a generous 401(k) plan in place. When looking to save for the future, many options present themselves offering different benefits and costs. For many though, especially lower and middle income business owners, the simplicity of using an IRA fits their needs perfectly.

Here’s why:

  • the maximum contribution allowable for IRAs for people under age 50 was $5,000 in 2012 but it will increase to $5,500 in 2013 and continue to increase with inflation – which is enough for most people to start
  • many institutions charge no fees to set up and maintain an IRA
  • IRA’s require no business level paperwork or maintenance – -they are personal accounts
  • contributing to an IRA does not require contributions to an employee’s account also

Why not establish a business level retirement plan such as a 401(k), SIMPLE IRA or SEP? Here’s why a low to middle income owner might not want to:

  • if you plan on saving $5,000 or less ($5,500 in 2013 and $6,500 for people age 50+ in 2013), why bother with the extra paperwork?
  • the administration involved in a 401(k) plan, for example, can be time consuming, and troublesome if rules are not followed exactly
  • contributions for employees may be required depending on the plan. SIMPLE IRA’s require employee contributions. If you want to motivate employees, that’s fine but if you can’t afford it, don’t put the noose around your neck!
  • more investment options, flexibility and withdrawal privileges with an IRA vs a 401(k)

This is why the tax law changes from the American Tax Relief Act of 2012 (i.e. ATRA or the fiscal cliff deal recently passed) which now indexes IRA contributions to inflation are wonderful. $5,500/year, increasing plus if you’re married that’s $11,000/year combined before you need to consider complicated and/or costly retirement plan set ups – is something to really sink your teeth into. The new generation of entrepreneur type workers, like software contractors, programmers, designers, along with young blue collar business owners can use an IRA until they are making so much money that spending some money on the administration of a more serious plan isn’t a big problem.


Want to learn more about IRA’s? Glad you asked- we have IRA education in our Financial 101 section HERE.

Did you recently inherit an IRA? Read our recent article on Mistakes to Avoid

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