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If you don't see yourself as someone who would end up with one (or a few) employer and would have long periods of self-employment, what is the best approach to retirement plans?

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There are several options (very simplified):

  1. Traditional IRA - you can deduct IRA contributions from your taxable income up to a certain level, and contribute up to 5000 to IRA per year.

  2. SEP-IRA - IRA for self-employed, has higher contribution limits that can be deducted from the taxes. You can also do "profit sharing" through this plan, but be careful - if you have employees they must be eligible.

  3. Solo 401k - a 401k plan for self-employed (for a single member, generally). Same as a regular 401k, except that you're the employee and the employer, so you can match your own contributions. As with SEP-IRA, if you have employees they cannot be discriminated. Solo 401k is easier to manage than a regular 401k, as long as the plan assets are kept below certain level ($250K IIRC). It might be better for you if your self-employment income is not that high (SEP-IRA has limits calculated based on the self employement income, 401k has this limit on matching only).

  4. Manage your own retirement savings without a dedicated program. You won't have any limitations and won't require to allow participation for your employees, but you lose the tax benefits.

Here's a good article covering these issues.

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Ali - As I started composing, I saw littleadv answer. Let me just add my thoughts to complement his answer. (so, any reader, I did not repeat the excellent advice below, just added this extra.)

The IRA comes in two flavors, the Traditional, he mentioned, and the Roth, in which you deposit post tax money, but then never pay tax on the account again. If your income fluctuates, it can make sense to use a Roth in low income years. The deposit limit is the same, and the limit is for both accounts, i.e. you can have a Roth and a Traditional, pretax, but the deposits can't add to over the $5000 total.

The issue of the Individual 401(k) exceeding $250K is noted, but just a form. My friend The Financial Buff wrote Form 5500-EZ For Your Solo 401k which describes the form.

If the $5000 is all you feel you'll deposit now, there's no issue starting the account and when ready to go higher, open the 401(k). Most brokers offering the 401(k) have no separate fees, just the cost of trades. Schwab (whom I use for my IRAs) offers the individual with no fees and certain ETFs with no trade cost at all.

If you have an employer, you can use their 401(k) and transfer it when you move on.

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