What You Need to Know About SEP-IRA for Freelancers
When you’re a freelancer, you have a ton of things to worry about: quarterly taxes, billing clients, turning off distracting roommates, and rushing to earn next month’s rent. And while money may not be enough ( financial instability is one of the curses of freelance living ), you still need to set aside some of your funds for retirement – there is no employer to automatically enroll you.
You are probably familiar with Individual Retirement Accounts (IRAs) and Roths. Simplified Employee Pension or SEP-IRA is another option if you are a freelancer or business owner with one or more employees.
“SEP IRA may be your best bet if you are a one-man show and plan to continue like this,” writes CNN Money . “You can open it at almost any bank, mutual fund or brokerage firm and pay low annual fees or not pay at all.”
The biggest difference between SEPs versus a traditional IRA or Roth is that the contribution cap is higher: you can contribute 25 percent of your total income or $ 55,000 for 2018, whichever is less. Compare that to the $ 5,500 IRA limit in 2018 ($ 6,500 for those over 50) and the 401 (k) contribution limit of $ 18,500 ($ 24,500 for those over 50).
Money is taxed when you withdraw it, like a traditional IRA. There are no additional fees, but with a high limit, this is not a problem. And if you have a bad year, you can contribute less (or nothing), while increasing your contributions when you have more opportunities.
If you are constantly saving money, you can probably save more for retirement than with a traditional IRA. This graph from Wealthfront is illustrative (note: it leaves IRA contributions at $ 5,500, although there will be increases and assumes an annualized rate of return of seven percent):
The only complicating factor is the deduction of your contributions. On Wealthfront:
In short, the deduction from your annual SEP contributions cannot exceed 20% of your net income from your business (apart from the 25% of your total compensation minus the self-employment tax used in describing the contribution limits at the beginning of this post). For a person with a net income of $ 200,000 and a self-employment tax of $ 9,728, the maximum deductible contribution is $ 14,841.
This is something you might want to discuss with a financial advisor .
However, a brief tax headache is worth the potential benefits. For information on other types of freelance retirement accounts, including Solo 401 (k) s, see this article .