A self-employed worker who contributes to SEP-IRAs for his employees increases business expenses. This reduces net profit, reducing both self-employment tax and income tax. With a traditional IRA, you can make contributions with money before taxes, reducing your taxable income. Your investments will grow tax-free until you make distributions at age 59 and a half, where you will be taxed on the amount distributed.
Roth IRAs differ in that they are funded with after-tax dollars, meaning they have no impact on your taxes and you won't pay taxes on the amount when making distributions. A common question we receive is whether the Solo 401 (k) can reduce the self-employment tax. If you own your own business, or work with others as a partner in a partnership, work as an independent contractor, or as a freelancer, you are generally considered to be self-employed, where your income is subject to self-employment tax. This is an IRA available to self-employed taxpayers that has gained popularity due to ease and increased benefits.
If you're self-employed, run a small business, or earn money in addition to your regular income at work, SEP contributions to an IRA can help you increase your tax-deferred retirement savings. However, you pay taxes on distributions of the sums you withdraw from your traditional IRA in the year you accept them. Normally, you can't contribute to an FSA and an HSA in the same year, although there are some exceptions. A simplified employee pension plan or SEP allows small business owners to make tax-free contributions to their employees' retirement plan, but SEP IRAs can also offer significant income tax savings.
Let's look at those and other ways to reduce your gross income, freeing up funds to contribute to an IRA and get the maximum advantage. The contributions to be made are calculated based on the benefit you will receive when you retire, your age and the expected returns on investment. But keep in mind that there are restrictions on what accounts you can have and how much you can contribute. Specifically, your modified adjusted gross income (MAGI) determines whether or not you can contribute to a Roth IRA and how much you can contribute.
The Internal Revenue Service (IRS) sets limits on the amount you can invest annually in an IRA, whether you choose the Roth option or the traditional IRA. Contributions are generally tax-deductible, and distributions during retirement are taxed as ordinary income. Contact IRA Financial at 1-800-472-0646 or complete the form to learn more about opening a self-managed retirement account. In addition to normal business-related deductions, consider making contributions to a simplified employee pension (SEP), an individual 401 (k) plan, or other tax-deductible retirement plan, if applicable.