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Self-Employed? Go Ahead, Make That IRA Contribution

Your IRA contributions don't affect your Simplified Employee Pension or solo 401(k) limits.

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QI’m self-employed and want to contribute to a Simplified Employee Pension (SEP) or a solo 401(k). Can I also contribute the full amount to a Roth IRA?

AYes. Your IRA contributions don't affect your SEP or solo 401(k) limits. The IRA can be a Roth if your modified adjusted gross income is less than $133,000 and you file taxes as an individual, or $196,000 if you're married and file jointly. The contribution amount starts to phase out if you earn more than $118,000 if single or $186,000 if married filing jointly.

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You can also contribute up to 20% of your net self-employment income to a SEP, with a maximum of $54,000 in 2017. Or you can contribute up to $18,000 (or $24,000 if you're 50 or older) plus up to 20% of your net self-employment income to a solo 401(k), up to a $54,000 maximum ($60,000 if you're 50 or older). "Net self-employment income" is defined as your business income minus half of your self-employment tax.

The lower your self-employed income, the more you can contribute to a solo 401(k) compared with a SEP. If, for example, you have $18,000 in net self-employment income, you can contribute the full $18,000 to a solo 401(k), but you can contribute only $3,600 to a SEP.

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Other useful facts about retirement plans for self-employed workers:

If you work full-time and contribute to your employer's 401(k) but also do some freelance work on the side, you can contribute to a SEP. Your 401(k) contributions don't affect your SEP limits, which are based on your self-employment income.

However, your contributions to an employer's 401(k) for a full-time job do affect the amount you can contribute to a solo 401(k) for freelance income. Because you're both the employer and the employee when you have self-employed freelance income, you can make two types of solo 401(k) contributions. You can usually contribute up to $18,000 (or $24,000 if you're 50 or older) as an employee, plus you can contribute up to 20% of your net self-employment income as the employer.

The maximum for both contributions combined is $54,000 in 2017 (or $60,000 if you're 50 or older). If you already contribute $18,000 to a 401(k) at your full-time job, you lose the $18,000 part of the calculation for the solo 401(k). But you can still make the full contribution as an employer, contributing 20% of your net self-employment income up to the maximum of $54,000 to your solo 401(k) (or $60,000 if you’re 50 or older).

For more information and worksheets to calculate how much you can contribute, see IRS Publication 560, Retirement Plans for Small Business.

SEE ALSO: 10 Things You Must Know About Traditional IRAs

Got a question? Ask Kim at askkim@kiplinger.com.