When I left corporate, I was worried about not having a 401(k). Then I learned about the SEP IRA, and for my situation, it worked even better.
A SEP IRA lets you contribute a significant amount toward retirement based on your self-employment income, up to the IRS annual limits. Those contributions are tax-deductible, which can help lower your taxable income.
The downside? If you have employees, you generally have to contribute the same percentage to their SEP IRAs that you contribute to your own. That’s where other retirement plans like a 401(k) can become more attractive since employees can contribute to their own accounts, and you decide whether to offer an employer match.
For me, the SEP IRA is my favorite because it’s simple and requires very little paperwork.
One issue I find with entrepreneurs is that they find themselves scrambling to find the funds when tax time comes. “I don’t have enough to max my contribution!” they claim. Well, here’s an entrepreneurial tactic I use to make sure I have enough for both my SEP IRA contribution and my taxes at the end of the year: Every time I get paid, I put away 25% into a separate savings account for taxes. Many entrepreneurs think “I’ll just do that when tax time comes” but most end up using it on business expenses or taking draws during the year and have to replenish in pinch. When tax time comes, you shouldn’t be scrambling to find the money for contributions. Consistency and discipline is key even if it’s annoying during the year.
This material is for general information and educational purposes only and is not intended to provide specific advice or recommendations for any individual. Investing involves risk including the loss of principal. There is no assurance that the views or strategies discussed are suitable for all investors or will yield positive outcomes. Contributions to a traditional IRA may be tax deductible in the contribution year, with current income tax due at withdrawal. Withdrawals prior to age 59 ½ may result in a 10% IRS penalty tax in addition to current income tax. A Roth IRA offers tax deferral on any earnings in the account. Qualified withdrawals of earnings from the account are tax-free. Withdrawals of earnings prior to age 59 ½ or prior to the account being opened for 5 years, whichever is later, may result in a 10% IRS penalty tax. Limitations and restrictions may apply.
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