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When deciding how much to contribute to any retirement plan, you must first consider how much you can afford to save without seriously compromising your lifestyle – and how much you'll need during retirement.

Once you've got that figured out, you should opt for tax-sheltered plans whenever possible. The purpose of these investment vehicles is to grow your nest egg while minimizing your tax obligations.

Tax-sheltered plans vary in terms of when and how much you'll be taxed, as well as the maximum annual contributions you can make. The tax laws can get pretty complicated, so it's a good idea to discuss your options with a financial adviser.

The Individual 401(k) is an especially good choice if you are scrambling to build up your retirement savings and can afford to sock away a considerable portion of your earnings. The generous contribution formula lets you put aside more money at a lower income level than you can with a SEP IRA.

As an employee, you can stash away as much as $16,500. As the boss, you can contribute an additional 25% of compensation, up to a maximum of $49,000, including your employee contribution. These contributions are discretionary, so you can save the maximum in flush years and nothing in tougher times.

If you and your spouse are both in the plan and enjoy a banner year, you could save a total of $98,000. And if you are both 50 or older and eligible for catch-up contributions of $5,500 each, the total climbs to $109,000.

It's also possible to take out a loan against an individual 401(k). That can be useful if you need funds during a business crunch. You can borrow half the account's balance, up to $50,000, and typically take up to five years to pay it back (provider rules vary). That said, borrowing from a retirement plan should be a last resort, since it could seriously undermine your long-term goals.

Individual 401(k)s come with a bit of bureaucratic hassle. Once your balance exceeds a certain level – $250,000 in 2010 – you have to fill out an IRS form (form 5500) every year, which adds a bit to your accountant's bill.

Good news: There are a lot of them. The challenge is figuring out which of the major lone-eagle plans best suits you.

The most common retirement accounts for the self-employed are SEP IRAs, Simple IRAs and individual 401(k)s. These plans have two factors in common: up-front tax breaks and tax-deferred saving, meaning you don't pay taxes until you withdraw the money in retirement.

The Roth version of the individual 401(k) is slightly different: you don't get an up-front tax break, but your money not only grows tax free, withdrawals in retirement are also tax-free.

There are two sets of contribution limits: one for the employee and one for the employer.If you're an employee, you can contribute a percentage of your salary up to a limit of $11,500 for 2010. If you're 50 or older, you can make an additional $2,500 "catch up" contribution.

Your employer must make a contribution every year it maintains the plan. The company can contribute either 2% of your compensation or a dollar-for-dollar matching contribution not to exceed 3% of pay. Your employer must make a contribution even if you choose not to, and all employees must receive the same type of contribution.

Finally, your company can lower the matching contribution to 1% or 2% of total compensation in any two out of five years that the plan is in effect. In the other three years, the company must make either a 3% match or the 2% flat contribution.

If you are a small business owner or a self-employed person and you haven't set up any other type of work-related retirement plan, consider the SIMPLE IRA. Unlike profit-sharing or 401(k) plans, SIMPLE IRAs are easy to set up and easy to administer.

This is especially true if you work alone but aspire to run a bigger business. Adding even one full-time employee to other plans, like a SEP IRA, can be a big hassle. Not so with a SIMPLE IRA. Keep in mind that the SIMPLE IRA's contribution limits are much lower than those for an SEP IRA ($11,500 for the SIMPLE in 2010, versus a maximum of $49,000 for the SEP), which can affect your ability to save enough for a comfortable retirement.

A SIMPLE IRA, or Savings Incentive Match Plan for Employees, is a type of traditional IRA for small businesses and self-employed individuals. As with most traditional IRAs, your contributions are tax deductible, and your investments grow tax deferred until you are ready to make withdrawals in retirement.

Unlike SEP IRAs, SIMPLE IRAs allow employees to make contributions. What makes a SIMPLE IRA unique is that the employer is required to make a contribution on the employee's behalf – either a dollar-for-dollar match of up to 3% of salary or a flat 2% of pay – regardless of whether the employee contributes to the account.

SIMPLE IRAs have higher contribution limits than traditional and Roth IRAs, and it's cheaper to set up and run a SIMPLE IRA plan than it is to administer many other workplace retirement plans.

To set up a SIMPLE IRA an employer must have 100 or fewer employees earning more than $5,000 each – including all employees who have worked at any point in the calendar year. And the employer cannot have any other retirement plan besides the SIMPLE IRA.

If your employer offers a SIMPLE IRA, you qualify to contribute if you earned at least $5,000 a year during any two years before the plan was set up, and if you expect to earn at least $5,000 this year.

An employee is eligible to participate in a SEP IRA if he or she is at least 21 years old and has worked for the company in three of the last five years, and received at least $550 in compensation during the year.

As an employer, you don't have to fund contributions every year. But when you do choose to make contributions, you must contribute not only to your own SEP IRA, but the SEP IRA of every eligible employee.

A SEP IRA may be your best bet if you are a one-person show and plan to keep it that way. You can open one at virtually any bank, mutual fund company or brokerage firm, and pay low or no annual account fees. Your contribution limit is based on a simple formula: You can put away as much as 25% of your net income, up to a cap that increases periodically to keep pace with inflation. In 2010, the cap is $49,000.

If you're a small business owner, SEP IRAs are appealing because they are easy and inexpensive to set up, and contributions are tax deductible. A SEP IRA's funding flexibility is also a draw. If you have a tough year financially, you can choose not to contribute to the plan. If you have a great year, you can fund the plan with a larger contribution than you'd originally intended.

A SEP IRA is a type of traditional IRA for self-employed individuals or small business owners. (SEP stands for Simplified Employee Pension.) Any business owner with one or more employees, or anyone with freelance income, can open a SEP IRA. Contributions, which are tax-deductible for the business or individual, go into a traditional IRA held in the employee's name. Employees of the business cannot contribute – the employer does. Like a traditional IRA, the money in a SEP IRA is not taxable until withdrawal.

One of the key advantages of a SEP IRA over a traditional or Roth IRA is the elevated contribution limit. For 2010, business owners can contribute up to 25% of income or $49,000, whichever is less. 

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