Self-Employed Retirement Contributions
Self-employed individuals have several options to contribute to retirement accounts, allowing them to save for retirement while potentially reducing their taxable income. The most common retirement vehicles for self-employed individuals include the Simplified Employee Pension (SEP) IRA, Solo 401(k), and Individual 401(k). These plans offer tax advantages and flexibility in contribution amounts.
Contribution Limits for 2025
- SEP IRA: The maximum contribution is 25% of compensation or $69,000, whichever is less.
- Solo 401(k): Allows contributions of up to $69,000 (or $76,500 if age 50 or older), combining employee and employer contributions.
- Individual 401(k): Same contribution limits as Solo 401(k), with the ability to make both employee and employer contributions.
How to Contribute
Self-employed individuals can set up a retirement plan through a financial institution or custodian. Contributions are typically made on a pre-tax basis, reducing taxable income for the year. The contributions are then invested in a variety of options, such as mutual funds, stocks, or bonds.
Tax Implications
- Contributions to traditional retirement accounts are generally tax-deductible, reducing your adjusted gross income (AGI).
- Distributions from these accounts are taxed as ordinary income in retirement.
- Early withdrawals before age 59½ may incur a 10% penalty, unless an exception applies.
Reporting Requirements
Self-employed retirement contributions must be reported on Form 1040, Schedule 1 (Additional Income and Adjustments to Income). The deduction is claimed on line 16 (for SEP IRA) or line 17 (for Solo 401(k) or Individual 401(k)).
Source:
Publication 590-B: Contributions to Individual Retirement Arrangements (IRAs)
Publication 575: Pension and Annuity Income
Publication 334: Tax Guide for Small Business
Publication 505: Tax Withholding and Estimated Tax
Disclaimer: Always verify details with the official Federal or State Department of Revenue Forms and Instructions.