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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Question: I’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?

Answer: Yes. 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.

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.

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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.

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).

Kimberly Lankford
Contributing Editor, Kiplinger's Personal Finance

As the "Ask Kim" columnist for Kiplinger's Personal Finance, Lankford receives hundreds of personal finance questions from readers every month. She is the author of Rescue Your Financial Life (McGraw-Hill, 2003), The Insurance Maze: How You Can Save Money on Insurance -- and Still Get the Coverage You Need (Kaplan, 2006), Kiplinger's Ask Kim for Money Smart Solutions (Kaplan, 2007) and The Kiplinger/BBB Personal Finance Guide for Military Families. She is frequently featured as a financial expert on television and radio, including NBC's Today Show, CNN, CNBC and National Public Radio.