Estimate SEP IRA contribution limits and tax impact for self-employed individuals.
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A Simplified Employee Pension (SEP) IRA allows self-employed individuals and small business owners to contribute significantly more to retirement than a traditional or Roth IRA. For 2024, you can contribute up to 25% of your net self-employment income, with a maximum of $69,000.
The SEP IRA contribution formula has a nuance that trips up many freelancers. You calculate 25% not of your gross income, but of your net self-employment income after subtracting half of your self-employment tax. This effectively reduces the contribution percentage to about 20% of your net SE income before the SE tax deduction.
A traditional IRA limits contributions to $7,000 per year ($7,500 if age 50+). A SEP IRA allows up to $69,000. For a freelancer earning $150,000, a SEP lets you shelter nearly 10 times more income from taxes. The tax savings compound dramatically over time.
If you want to maximize retirement savings beyond what a SEP allows, a Solo 401(k) may be a better option. It adds an employee contribution ($23,000 / $30,500 if 50+) on top of the employer contribution, potentially allowing a higher total contribution. However, it requires more administration and must be established before December 31 of the tax year.