The best retirement account for the self-employed

What is the best retirement plan for a self-employed person with no employees and modest income? With SIMPLE IRAs, KEOGH plans, SEP IRAs, and 401(k)s, the choices abound and they are all confusing. Now there is a clear winner.

Without a doubt, the winner is the 401(k), with Roth 401(k) option available, from T. Rowe Price. This is a great option for a few reasons:

  1. Low costs. There are no setup fees. There are no ongoing fees except for a $10 yearly fee for each fund with under $4,000. I would investing in just one fund until it is over $4,000 and then starting other funds for diversification. This should keep fees under $10 per year for the first couple years (you should need no more than a couple different funds).
  2. There are a couple decent index funds and other funds with low expense ratios. I’d prefer there to be more and cheaper index funds, but there are some. I like the International Equity Index Fund (PIEQX) with an expense ratio of 0.50%, the US Total Equity Index Fund (POMIX) with expenses of 0.40%, and I like a little less the target date funds (such as the 2055 fund, TRRNX, with expenses at 0.74%).
  3. Roth 401(k) option. For most people, Roth IRAs and Roth 401(k)s are better than the normal options. With a Roth option, you invest post-tax money. You get no deduction, but your retirement money (including the money you make in it) is never ever taxed again.
  4. 401(k)s allow for greater contributions as a percentage of income (particularly for low-income people) and greater total contributions for high earners than SEP IRAs or SIMPLE IRAs.

For those making a lot of money, it may make since to choose another 401(k) provider that charges higher fees but offers funds with lower expense ratios. While Fidelity offers a good solo 401(k) plan, it currently does not offer the Roth option. If Fidelity does offer that, it would probably be a better choice.

The one problem with 401(k)s is that they were designed for bigger businesses. The paperwork is a hassle but the increased contribution limits relative to SIMPLE and SEP IRAs is worth the effort. Remember to also contribute the maximum to a Roth IRA as well as to a 401(k).

Disclosure: I use T. Rowe Price for my solo 401(k) for my freelance writing business.

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