By Mark J. McCandless, CPA, CFP®, MTax
President, Pathfinder Wealth Advisors LLC
In an era when many individuals are either full time self-employed consultants or doing some type of consulting in addition to being employed full time by an organization, a question often arises regarding how to “capture” some of those earnings for retirement. One solution that is easy to establish and has great flexibility is a SEP-IRA. A SEP-IRA is a written employer plan that permits an employer to make deductible contributions into an IRA for the employee. The SEP – IRA is controlled by the employee or the self-employed individual. If you are the one doing the consulting, you could make a contribution to your SEP-IRA out of your net earnings from consulting (also known as “self-employment income”).
The amount you can contribute is based upon a percentage up to 25% of your “net” earnings from self-employment. The “net” is important because it is defined as:
Your consulting revenue
Less your business expenses
Less one half of the self-employment tax you pay
Less your SEP-IRA contribution
= Net Earnings from Self - Employment
You may be thinking “How can I know what I can deduct if I have to base my contribution on what I’m going to contribute?” Fortunately, the IRS provides helpful tables to determine the exact percentage to contribute assuming various contribution rates. The maximum contribution to a SEP-IRA for 2018 is $55,000. However you can contribute a smaller amount based upon your cash flow.
The plan is also easy to set up. You complete the IRS form 5305-SEP and maintain it in your files to show you adopted the plan. If you have employees, you must provide a copy of this form and additional information indicated in the instructions regarding the accounts. If you have employees, you must contribute to their IRAs in the same percentage as your own contribution.
I have helped many individuals over the years supplement their retirement contributions and save taxes through the use of plans like SEP-IRAs. Every situation is unique and every solution does not fit all situations. If you would like guidance on retirement, investment or other tax planning ideas, please feel free to contact me at Mark@PathfinderWealthAdvisors.com
More advice from Mark McCandless: Dealing With Volatile Markets
Mark J. McCandless, CPA, CFP®, MTax, President
Pathfinder Wealth Advisors, LLC
6100 Oak Tree Blvd. Suite 200, Independence, Ohio 44131
"Dedicated to our clients and their success"
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