Question
What is the best retirement program for a sole practitioner and why?
Mike Byrnes, President, Byrnes Consulting, www.byrnesconsulting.com
Answer
As with all things retirement, the answer is "it depends on … ."
Here's the base info for tax year 2013:
If your income is lower, say under $90,000, then a SIMPLE IRA is your best bet. You can defer up to $14,500 of salary if you are age 50+ and use the catch-up provision and you make at least that amount.
If, on the other hand, your income is above about $90,000, then a 401(k) is the best option as you can defer up to $23,000 if you are age 50+ and use the catch-up provision.
In addition, the employer can contribute up to a combined total of $51,000 per year. If you are under age 50, the limits are lower for both the SIMPLE IRA and the 401(k).
Further, if you believe that your tax rate in retirement will be less than it is today, a deferred tax account, like the SIMPLE IRA or the 401(k), provides the best tax benefit. Most people make that income and tax rate assumption.
If, on the other hand, you believe that your tax rate in retirement will be higher than it is today, then the Roth series (401(k) or IRA) provides superior tax benefit.
As always, consult your tax adviser, attorney, or financial adviser. This is not a simple matter. And this answer should not be considered tax or investment advice.
About the author: Michael F. Sullivan, Associate Professor of Finance, Opus College of Business
CFO and CIO (retired), University of St. Thomas
