I am self employed, my wife works for a company. Who is better to contribute to a retirement plan?

Question

Will i get a better tax benefit since I have to pay self employment taxes on my income?

Answer 1

First off, contributions to retirement plans are NOT exempt from Social Security and Medicare or Self-Employment taxes. They are only exempt from income tax and only certain types of plans have any up-front tax benefits. For example, a Roth type plan has no tax benefit going in, the benefit is all on the back end when you take your distibutions from the plan tax-free.

As a self-employed individual you have a number of options available to you. You can open a traditional IRA or Roth IRA. Or you can look into a SEP-IRA type of plan. These are ideal for the self-employed and small business owners as they allow much larger contributions than a standard IRA does.

You and your spouse should each have your own separate retirement plan. Although divorce may be untinkable to you right now, statiscally your marriage will not last. The worst that can happen in a marital breakup is that one party is left destitute with no retirement at all. The next worst if having to share a hard-won retirement benefit with a spouse who may not be "deserving" at least in your own mind.

Consult with an independent fee-based Certified Financial Planner who does not sell any investment products. They will help you review your financial situation, resources and goals and select the best retirement vehicle for you. A full workup may cost you a couple of thousand but is money wisely spent over the long term. (I have to disagree with Tim on this point. A financial planner who sells investment products is motivated by how much money he or she can make off of the investment products they sell you, NOT what is in your best interests! NEVER use a "financial planner" who sells anything other than planning and advice. They are NOT financial planners but are just glorified salesmen and securities dealers.)

A poor decision today could leave your menu selection in your "golden years" limited to Alpo or worse. Careful planning today may leave you choosing between Honolulu or Scottsdale for your retirement home, a MUCH more palatable choice to have to make.

Answer 2

Retirement plan contributions do not affect self-employment taxes (or social security taxes, FICA withholdings, OASDI withholdings, medicare taxes, etc.) They only affect income taxes. If you file jointly, the tax benefit is the same regardless of who contributes. If you file separately, whoever is in the higher tax bracket should contribute.

Answer 3

That would depend on her plan, and whether it has some kind of employer match involved. If it does, the match is probably worth more than the tax you'd save by contributing to a plan for yourself.

If you can afford it, contributing to BOTH would be a good idea.

Answer 4

It depnds on the plan offered by your wifes employer. Why not contribute to both?

As a self employed there are a number of different plans you can chose from. You both also have a ROTH choice.

Best bet is to sit down and talk with a financial planner, they usually won't charge anything and get their commission from the investments you make.