How Much Can I Contribute to My IRA If I'm Self-Employed?

By Dan

With most jobs, your employer typically takes care of many of the employee benefits that workers take for granted, such as health insurance or a retirement plan. But when you're self-employed, it's all up to you to figure out how best to save for retirement. Fortunately, there are different types of retirement plans, such as SIMPLE IRAs and SEP IRAs, that are extremely useful for self-employed workers to use. That way, you might be able to contribute more, using higher salary deferrals to boost your total savings and reduce your taxes.

Continue Reading Below

The general rule

Self-employed income is treated as earned income for IRA purposes, and so if you're self-employed, you can at least make the maximum contributions allowed for ordinary IRAs. For 2017, those limits are $5,500 for those who are younger than 50, and $6,500 for those who are 50 or older and therefore qualify for additional catch-up contributions.

Image source: Getty Images.

More From

3 ways to save more toward retirement

However, if you want, you can go above and beyond an ordinary IRA. There are three commonly used retirement plans for self-employed individuals:

  • The SIMPLE IRA lets you set aside up to $12,500 for those under 50, or $15,500 for those 50 or older. In addition, as an employer contribution, you can match your regular contributions dollar-for-dollar up to 3% of your salary.
  • The SEP IRA gives you the opportunity to set aside about 20% of the adjusted profit from your business. That's subject to a maximum of $54,000, giving you plenty of latitude for large contributions.
  • The solo 401(k) is a personalized 401(k) plan for self-employed individuals. Under the plan, you can contribute up to $18,000 if you're under 50 or $24,000 if you're 50 or older, plus the same roughly 20% amount of adjusted profit that SEP IRA users can use. There are other limits that restrict your total savings, and technically, solo 401(k)s are not IRAs. But the net impact is that you get to save more for retirement.

Figuring the math on these plans can be complicated. But the following calculator makes it easier.

* Calculator is for estimation purposes only, and is not financial planning or advice. As with any tool, it is only as accurate as the assumptions it makes and the data it has, and should not be relied on as a substitute for a financial advisor or a tax professional.

An example

Running through an example can make it easier to understand your options. Say that you have a net profit of $50,000 in your business and you're 45 years old. When you enter the appropriate numbers in the calculator, you'll find that you can:

  • Save $13,853 in a SIMPLE IRA. That's composed of $12,500 from your employee contribution and $1,353 in matching contributions, based on your net earnings.
  • Save $9,294 in a SEP IRA. That corresponds to about 20% of your adjusted earnings, which is pushed downward slightly to account for the employer portion of self-employment taxes.
  • Save $27,294 in a solo 401(k), made up of the same $9,294 calculation for the SEP IRA plus $18,000 for the 401(k) portion of the account.

Setting up these plans varies in complexity, but financial institutions are typically willing to set them up for you. The SIMPLE IRA is arguably the easiest to establish, with additional paperwork required for the SEP IRA and solo 401(k). However, the extra effort for the solo 401(k) isn't so onerous that it makes the big boost in potential savings not worth it.

If you want to save for retirement as a self-employed worker, everything will generally be up to you. By being smart about which retirement savings vehicles you use, you can often save a whole lot more than the typical worker and get yourself one step ahead of your peers on the path to a financially secure retirement.

The $16,122 Social Security bonus most retirees completely overlook If you're like most Americans, you're a few years (or more) behind on your retirement savings. But a handful of little-known "Social Security secrets" could help ensure a boost in your retirement income. For example: one easy trick could pay you as much as $16,122 more... each year! Once you learn how to maximize your Social Security benefits, we think you could retire confidently with the peace of mind we're all after.Simply click here to discover how to learn more about these strategies.

The Motley Fool has a disclosure policy.