Are you self-employed? Here’s how a SEP IRA can help you save money in 2024.

If you’re self-employed, you may be looking for ways to save more money for retirement while reducing your taxes. Along with other tax-advantaged retirement accounts like traditional IRAs and Roth IRAs, self-employed individuals have another unique option to invest for retirement. This is a SEP (Simplified Employee Pension) IRA.

With a SEP IRA, self-employed individuals and small business owners have a flexible and powerful option to set aside additional funds for retirement. Depending on your small business’s income, employees may be able to save more money for retirement with a SEP IRA than they can with a 401(k) plan.

Let’s take a look at how a SEP IRA works, why it’s a good idea for small businesses, and how it can help you invest for retirement while saving you money on taxes.

Simplified Employee Pension (SEP) IRA: How It Works

You can set up a SEP IRA through a brokerage or investment company the same way you open an IRA. For example, Charles Schwab, Fidelity, and Vanguard all offer SEP IRA accounts. Self-employed individuals, freelancers, and small business owners can set up SEP IRAs for themselves and their employees.

A SEP IRA is a type of Traditional IRA and works the same way as a traditional IRA. That means the money you put in may be tax deductible. However, there are complicated rules and limitations on how much you can put into a SEP IRA. This will depend on your type of business structure, net business income, whether you have employees, etc.

In 2023, employer contributions to a SEP IRA per employee can be up to $66,000 or 25% of compensation, whichever is less. If your small business has employees, your employer must contribute to the SEP equally for all eligible employees, and those funds are 100% vested immediately. Employees own 100% of employer contributions to their SEP account.

If you are self-employed, figuring out how much you can contribute to a SEP IRA is a bit more complicated. The IRS defines a self-employed person’s “compensation” for SEP IRA contributions as net income from self-employment (gross business income minus business expenses) after deducting half of self-employment taxes and deducting SEP IRA contributions.

So, as a freelancer or sole proprietor, don’t assume that you can only put 25% of your gross business income into a SEP IRA tax-free. The exact amount you can put into a SEP IRA and deduct from your taxable income depends on several factors. Consult with a professional tax advisor and/or broker Make sure you understand the IRS rules for how much money you can put into a tax-deductible SEP IRA.

How to Save Taxes with a SEP IRA

SEP IRAs can be a flexible way for small business owners and self-employed people to save more for retirement while reducing their taxable income. In fact, a SEP IRA can help you save more for retirement than a 401(k) plan. The maximum an individual can contribute to a 401(k) in 2023 is $22,500; The amount going into a SEP IRA is $66,000.

Another reason why a SEP IRA can be a great retirement savings tool for business owners is that, in addition to employer contributions to a SEP IRA plan, you can also contribute additional money to traditional IRAs and Roth IRAs or to a SEP IRA as an individual. For example, as described on the IRS website, Nancy, 45, is the owner and sole employee of a small business. She contributes the maximum employer amount ($66,000) to her SEP IRA in 2023. Additionally, as an individual employee, she can make additional contributions to her SEP IRA, up to the 2023 contribution limit of $6,500. This $6,500 amount can be placed in a Roth IRA or split between a Roth IRA and a traditional IRA/SEP IRA.

Want to save on taxes in 2023? It’s not too late! You can deduct contributions to a SEP IRA as long as you make them by the 2024 tax filing deadline in 2023. Ask your brokerage about opening a SEP IRA for small businesses and see if you can make your contributions from previous years. 2023 contribution – 2024 is already here.

gist: If you have a successful small business and meet IRS guidelines for how to contribute to a SEP IRA, this can be a great way to supercharge your retirement savings while saving on taxes. Make sure you understand the exact rules for how much you can contribute to a SEP IRA based on your business income as an employer or self-employed person. Check with your accountant and broker to ensure you comply with IRS limits. This will help you avoid costly mistakes and fines.

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