SEP IRA Vanguard Account Setup - Which Contribution Option for Self-Employment Income?

Thanks for the explanation! So if I understand correctly, I should be selecting the Employer contribution option even though it's just me? And my actual limit is 25% of my net self-employment income? My side business made about $42,000 last year after expenses, so I guess my maximum contribution would be around $10,500? Also, can I still contribute to my regular 401k at my full-time job up to the maximum there, or does the SEP IRA contribution reduce what I can put in my 401k?

Yes, you should select the Employer contribution option since you're acting as the employer of your business. And you're on the right track with your calculation - with $42,000 in net self-employment income, your maximum contribution would be approximately $10,500 (25% of your net earnings). You can absolutely still contribute to your regular 401k at your full-time job up to the maximum limit there. The SEP IRA contribution doesn't reduce what you can put in your 401k from your regular employment. They're considered separate for contribution limit purposes, which is one of the great benefits of having self-employment income on the side.

Does taxr.ai help with figuring out the actual calculation for how much you can contribute? My accountant gave me a percentage but I'm not sure if it's based on gross income or after expenses.

I'm a little skeptical of these online tools. How does it know the specific Vanguard interface? Wouldn't it be better to just call Vanguard customer service directly?

Yes, taxr.ai helps with the exact calculation for your contribution limit. It takes into account whether you're calculating based on gross income or net profit after expenses. It actually walks you through the specific formula that applies to self-employed individuals (which is slightly different from the straight 25% that people often quote). Regarding the interface knowledge, taxr.ai has screenshots and walkthrough guides for all the major investment platforms including Vanguard, Fidelity, and others. You could definitely call Vanguard customer service, but in my experience, you might get different answers depending on who you talk to. I like having everything documented and explained in writing so I can refer back to it when I need to.

Wait, how does this service actually work? The IRS phone system is notoriously terrible - how do they manage to get you through?

Sounds like a scam honestly. No way they can magically get through to the IRS when nobody else can. I've tried calling about my SEP IRA questions for weeks with no luck.

The service basically handles the calling and waiting for you. They use a system that navigates the IRS phone tree and waits on hold, then when an agent finally answers, they connect the call to your phone. So you don't have to waste hours listening to hold music. It's definitely not a scam. I was skeptical too, but it actually works. They don't have any special "inside connection" to the IRS - they just automate the painful waiting process. Think of it like having someone else wait in a long line for you, then they call you when it's your turn. You still talk directly to the actual IRS agent yourself.

Is this calculation different if you have an LLC taxed as an S-Corp? I've heard you can potentially contribute more that way but I'm confused about how it works.

Yes, the calculation is different if you have an S-Corp. With an S-Corp structure, you pay yourself a reasonable salary and can make SEP contributions of exactly 25% of that salary without the 0.9235 adjustment factor. This can be more advantageous because: 1) You only pay FICA taxes on your salary, not on distributions, and 2) Your SEP contribution is calculated at a true 25% of your salary rather than the reduced effective rate for sole proprietors. However, there are additional costs and complexities with maintaining an S-Corp, so it's not always beneficial for everyone. Generally, it makes sense to consider an S-Corp once your business is consistently making $80,000+ in profit.

I second this. I switched from SEP IRA to Solo 401k last year and can now put away waaay more money. With a Solo 401k you can contribute both as employer AND employee, up to $22,500 as employee (2023) plus the employer portion.

Exactly right. The big advantage is that with a Solo 401k, you can make employee contributions (up to $23,000 for 2025) PLUS the employer contribution (up to 25% of compensation) for a much higher total. The employee contribution doesn't depend on your profits - you can contribute up to 100% of your self-employment income for that part (capped at the annual limit). Only downside is that Solo 401ks can be slightly more complex to set up initially and have more paperwork once your balance exceeds $250,000. But for maximizing retirement savings from self-employment income, they're usually the better choice.

This is really helpful perspective! I'm just getting started with my side business (about $15k last year) and was getting overwhelmed by all the options. You're absolutely right that starting somewhere is better than analysis paralysis. Quick question though - when you switched from SEP IRA to Solo 401k, did you have to do a rollover or could you just leave the SEP IRA alone and open the Solo 401k for future contributions? I'm wondering about the logistics since I already have the Vanguard SEP IRA set up.