Lack of retirement planning and savings is a major financial obstacle in our country and economy. When you consider that Social Security may look dramatically different in the next 20-30 years (or even non-existent), it’s time to take matters into your own hands.

If you have a very small business and are looking to set up a retirement plan, you may want to consider a self-employed 401(k) plan. These plans are also referred to as solo 401(k) or individual 401(k) and are designed for sole proprietors or corporations where the only employee is the owner (or owner and spouse).

The plans help if you have a smaller income from self-employment that needs sheltering from taxation. You may wonder how a business that makes very little can afford to contribute to a retirement plan. Let me explain. It would work in situations where the business owner may be operating the business as a side-line and earns the greater portion of his income working as a wage-earner in a firm that has no retirement plan in place. Or the business doesn’t make much, but the spouse supports the household with his/her wages. Then there’s the retired person with other sources of income who doesn’t need to rely upon the income provided by the business. These situations warrant consideration of the self-employed 401(k) plan.

There are two parts to the self-employed 401(k) plan:

1. Profit sharing, with a maximum of 20% of compensation for sole proprietors or 25% for corporations;

2. Elective deferrals of 100% of compensation up to $17,500 for 2013 plus $5,500 for taxpayers age 50 and older.

The overall maximum contribution for a self-employed 401(k) plan in 2013 is $56,500. This includes the catch up contributions for individuals age 50 and older. At lower income levels, a self-employed 401(k)/profit sharing plan allows a very large contribution/deduction.

A SEP IRA maximum contribution is $51,000 and does not allow for catch up contributions. Also, you need less self-employment income to reach the maximum contribution with a self-employed 401(k) plan than you need with a SEP. For 2013, you need self-employment income of $260,307 to max out the SEP contribution. But with the self-employed 401(k) plan you only need $174,157 of income.

In the past, administrative costs for a regular 401(k) plan were almost prohibitive for small business. But with the self-employed 401(k) plan the fees are much lower. And because the business has no employees (except for the owner and spouse), the nondiscrimination rules required for other 401(k) plans do not apply.

Now’s the time to set up a plan. Not only will you be saving for retirement but you will be saving on taxes right now.

Bonnie Leehttp://global.fncstatic.com/static/v/all/img/external-link.png is an Enrolled Agent admitted to practice and representing taxpayers in all 50 states at all levels within the Internal Revenue Service. She is the owner of Taxpertise in Sonoma, Calif., and the author of Entrepreneur Press book, “Taxpertise, The Complete Book of Dirty Little Secrets and Hidden Deductions for Small Business that the IRS Doesn't Want You to Know.” Her new e-book Taxpertise for the Creative Mind Murder, Mayem, Romance, Comedy and Tax Tips for Artists of all Kinds is available at all major booksellers. Follow Bonnie Lee on Twitter at BLTaxpertise and at Facebookhttp://global.fncstatic.com/static/v/all/img/external-link.png