After maxing out a Traditional or Roth IRA, self employed eBay sellers may consider opening a SEP IRA or Solo 401(k).
Whether you’re selling part time or full time on platforms like eBay, consider saving part of your income in a retirement account.
This article is intended to provide a brief overview of some of your retirement investment plan options in order to whet your appetite to dive into additional research on your own.
Roth or Traditional IRA
The first type of retirement account a self employed person may consider opening is a Traditional IRA or a Roth IRA. For the 2014 and 2015 tax years, the maximum contribution to a Roth IRA or Traditional IRA is $5,500 (or $6,500 if you’re 50 or old).
Self Employment Retirement Funds: SEP IRA, Solo 401(k) and SIMPLE IRA
If you find yourself maxing out your annual Roth or Traditional IRA contribution limit, then it’s time to think about opening a self employment retirement fund. The three most common self employment retirement funds are: SEP IRAs, Solo 401(k)s and SIMPLE IRAs.
SEP IRA (Simplified Employee Pension IRA)
A SEP IRA, according to the IRS, allows you to “Contribute as much as 25% of your net earnings from self-employment (not including contributions for yourself), up to $52,000 for 2014 ($53,000 for 2015)”. If you’ve already got a 401(k) plan through work, you can still contribute to a SEP IRA for your side business selling on eBay.
Solo 401(k) (aka Individual 401(k))
A Solo 401(k), also called Individual 401(k), is similar to a 401(k) you would get through work. Opening a Solo 401(k) requires significantly more paperwork than opening a SEP IRA or SIMPLE IRA (Hint: That IRA even has ‘simple’ right in the title). A Solo 401(k) also offers a Roth option, while SEP IRAs and SIMPLE IRAs only offer traditional pre-tax contributions.
SIMPLE IRA (Savings Incentive Match Plan for Employees IRA)
A SIMPLE IRA, according to the IRS, allows you to “put all your net earnings from self-employment in the plan: up to $12,000 in 2014 and $12,500 in 2015 (plus an additional $2,500 in 2014 and $3,000 in 2015 if you’re 50 or older) in salary reduction contributions and either a 2% fixed contribution or a 3% matching contribution.” The penalty for early withdrawals from a SIMPLE IRA within the first two years of establishing the plan is 25% (if you’re under 59.5 years old). After two years, the early withdrawal fee drops to 10%.
Which retirement plan should I choose?
Generally, a Solo 401(k) allows for the highest contribution and also offers a Roth option. Solo 401(k)s also require the most paperwork to set up out of the three plans. SEP IRAs have minimal paperwork and can be set up online in minutes.
You’ll likely be choosing between a Solo 401(k) (if you’re eBay business is big) and a SEP-IRA (if your eBay business is medium or small).
Ignorance is NOT bliss: Don’t put off opening a retirement account!
When I started out selling LEGO on eBay I didn’t know the first thing about self employment retirement plans. In fact, I hadn’t even heard of any of the self employment retirement plans before! After I started maxing out my annual Roth IRA contribution, I began wondering about additional retirement plan options. I dove into research mode, did a fair amount of Googling and finally stumbled onto information about Solo 401K, SEP IRA and SIMPLE IRA options for eBay sellers and self employed people in general.
Investing in a retirement account is investing in your own future. If you’re just starting your eBay business, thinking about saving for retirement may seem overwhelming. Even if you can only set aside a small amount each month, start the habit of investing in your retirement.
Plan options may also seem overwhelming–honestly, many of the details are a bit complicated–but do some research online. Many websites thoroughly examine pros and cons of opening each type of self employment retirement account and can help you choose with type is the best fit. You can also call brokerage firms like Fidelity, Vanguard, Charles Schwab, etc. and they can help you open an account and answer your questions.
Self Employment Retirement Account Resources:
Retirement Plans for Self-Employed People (a web page on the official IRS website)
SEP vs. SIMPLE vs. Solo 401(k) (article on Oblivious Investor)
SEP IRA vs. Solo 401(k) – Which is Better? (article on Investor Junkie)