SEP IRA (Simplified Employee Pension)

A SEP IRA is the easiest retirement plan for freelancers, consultants, and small business owners. It's like a supercharged Traditional IRA with much higher contribution limits.

Contribution Limits (2024):

• Up to 25% of net self-employment income
• Maximum: $69,000 (adjusted annually)
• Compare to Traditional IRA: $7,000 limit

Example: You earn $120,000 from freelancing.

• SEP IRA contribution: Up to $30,000 (25%)
• Tax savings (24% bracket): $7,200
• Future growth: $30,000 → $240,000 over 30 years (7% return)

Who Should Use It: ✅ Self-employed with high income (maximize tax savings) ✅ Solo entrepreneurs (no employees to cover) ✅ Business owners with few employees (must contribute same % to all) ❌ W-2 employees (use 401k instead) ❌ Businesses with many employees (cost prohibitive—must fund all employees equally)

SEP vs. Solo 401(k):

• SEP: Easier setup, lower admin, employer contributions only
• Solo 401(k): Higher limits ($69,000 + $7,500 catch-up), employee + employer contributions, allows Roth

Tax Benefits:

• Contributions are tax-deductible (reduce taxable income now)
• Growth is tax-deferred (no taxes until withdrawal)
• Withdrawals taxed as ordinary income in retirement

Rules:

• Must offer same % contribution to all eligible employees
• Can change contribution amount yearly (0-25%)
• Cannot take loans (unlike 401k)
• 10% penalty if withdrawn before 59.5 (except specific exceptions)

The Bottom Line: If you're self-employed and making good money, a SEP IRA is one of the best tax moves available. You slash your current tax bill AND build retirement wealth. Just remember: if you hire employees, you must contribute to their SEP IRAs at the same percentage as yours.