Self-Employed? Boost Your Retirement (and Lower Taxes) With a SEP IRA Today

SEP IRA rules

No one likes to pay taxes. But if you’re self-employed, you’re probably paying your fair share of them.

Last year, I made the most money I have in my entire life. Sounds exciting, right? Especially after coming off the heels of paying off debt.

But instead of rolling in the dough, I ended up with a huge and unexpected tax bill.

You see, I ended up making more without really adjusting my tax savings rate (you pay your own taxes when you’re self-employed). In one fell swoop, my emergency fund was gone in order to avoid tax debt. It sucked.

After this unfortunate experience, I was eager to learn how I could legally lower my tax liability and I found out about the SEP IRA. If you’re wondering “what is a SEP IRA?!” then read on to see how it can help you.

What is a SEP IRA?

You’re probably familiar with some of the retirement vehicles for employees. Yet, for small business owners, retirement planning can be a whole different ballgame.

Though there are several retirement options available for small business owners, a Simplified Employee Pension Plan (aka SEP IRA) can be a great option to plan for the future, while saving for today.

“A SEP IRA is one of the greatest things in our tax code,” says Abby Eisenkraft, tax professional and CEO of Choice Tax Solutions Inc.

“Most self-employed people usually do not have the benefit of a 401k plan, unless they also have a full-time job,” Eisenkraft explains. “The SEP IRA allows the self-employed person to contribute to a retirement plan in years that the business has profit.”

The good thing about the SEP IRA rules is that you can contribute more than other IRAs. For example, a Roth IRA or Traditional IRA typically cap out at $5,500 per year if you’re under the age of 50.

However, the SEP IRA contribution limits are more generous for self-employed business owners. They can contribute 25 percent of their earnings or up to $54,000 for 2017.

How a SEP IRA lowers your tax liability

Many retirement options have different tax advantages, and the SEP IRA is no exception.

Through a SEP IRA, self-employed folks can deduct a portion of their contributions. The SEP IRA deduction calculation is listed on the IRS website, though it is a bit complex.

In fact, the 21-step Deduction Worksheet for Self-Employed reads more like a complex math problem than a simple calculation. In other words, there isn’t a simple, standard amount you can deduct.

Though if you have your tax information ready, you can crunch the numbers to see what you can deduct. And if you have any questions, you can always talk to a tax professional as well.

“You don’t know the exact amount you can deduct until tax time — it’s based on the net profitability of the business, the self-employment tax you will owe, etc.,” notes Eisenkraft.

Additionally, contributing to a SEP IRA can help lower your tax liability, making you eligible for other tax benefits.

“Your adjusted gross income income is directly reduced by the contribution, and the contribution may assist in reducing the possibility of certain phaseouts,” Eisenkraft says.

“For example, if you are close to being phased out of the student loan deduction but can reduce your adjusted gross income, you may now be able to deduct your student loan interest,” explains Eisenkraft.

Are there any real tax advantages with a SEP IRA?

For me, a SEP IRA made sense because it allows me to put more toward retirement, while also lowering my tax bill. I didn’t save for retirement while I paid off my student loans and now that I’m 32, I’m seriously behind.

However, I can contribute more to a SEP IRA and reap tax advantages now.

After being wiped out by Uncle Sam thanks to taxes, the SEP IRA is my latest financial hack that I’m using to prepare for the future. All while saving on taxes today.

What’s more, I love that the SEP IRA rules are pretty generous. The SEP IRA contribution limits potentially allow you to save more than other IRAs and you also have more time to contribute than some other retirement options.

For example, with the SEP IRA, you can open an account and contribute up until the federal tax deadline. Then have it count for the previous tax year.

“You have extra time to come up with the money to contribute — you can contribute as late as April 15th of the following year,” says Eisenkraft.

So at this point, I am funneling money into my SEP IRA. That way when I do my taxes this year, I won’t experience a tax wipe out like I did last year.

In a short time, I’ve been able to see the impact contributing to a SEP IRA has had on my taxes.

Working with my accountant, we decide on how much I can reasonably contribute and how much I will owe in taxes given the SEP IRA rules. And I must say, it feels good to see my tax payments lower, while my savings gets higher.

Check out SEP IRA rules today

While the SEP IRA seems like a win-win, remember you must actually save and contribute to take advantage of all the perks.

So if you’re self-employed, check out the SEP IRA to see if it’s the right retirement option for you. It could help you save money on taxes while helping you prepare for the future.

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