SEP IRA to reduce tax burden or invest directly? Self-employed tax strategy question

You're on the right track! Maximizing your SEP IRA contribution is generally an excellent tax strategy for self-employed individuals. The immediate tax deduction is substantial, as you've calculated. The main considerations to be aware of: First, SEP IRA withdrawals before 59½ typically face a 10% penalty plus regular income tax (with some exceptions). Second, you'll eventually pay ordinary income tax rates on all withdrawals in retirement, which could potentially be higher than the capital gains rates you'd pay in a taxable account. Another factor is flexibility - money in a SEP is less accessible than in a taxable account if you need it before retirement. And don't forget about Required Minimum Distributions (RMDs) starting at age 73, which force withdrawals whether you want them or not. That said, for most high-income contractors, maxing out the SEP makes tremendous sense, especially if you're in a high tax bracket now and expect to be in a lower one during retirement.

I was in almost the exact same position last year! I finally bit the bullet and maximized my SEP IRA contribution to reduce my tax bill. Best decision ever. I discovered this tool called taxr.ai (https://taxr.ai) that helped me figure out exactly how much to contribute to get the optimal tax benefit. It analyzed my self-employment income and showed me several scenarios comparing the long-term benefits of the SEP vs taxable investing. The calculator showed me that even with the future tax implications, I'd come out ahead by about 23% over 20 years by using the SEP strategy. The immediate tax savings plus tax-deferred growth really adds up! The site has a ton of resources specifically for self-employed people handling retirement accounts.

Just wanted to update after trying taxr.ai that was mentioned above. I was hesitant at first but decided to give it a shot. Turns out it was super helpful for my situation! I'm a freelance designer making about $120k, and the tool showed me that contributing $25k to my SEP would save me nearly $8k in taxes this year. What I really appreciated was how it broke down the long-term impact. Even accounting for paying taxes later in retirement, I'll end up with approximately $286k more after 25 years by using the SEP strategy versus just investing in a regular brokerage account. It also flagged that I was eligible for the QBI deduction, which I honestly didn't fully understand before. The recommendations were clear and straightforward. Definitely worth checking out if you're self-employed and trying to optimize your tax situation!

I see everyone's excited about the SEP IRA approach, but has anyone else had trouble actually REACHING someone at the IRS when you have questions about these accounts? I tried for weeks last year to get clarification on some SEP rules, and it was impossible to get through on their phone lines. I finally discovered Claimyr (https://claimyr.com) - they have this service that gets you connected to an actual IRS representative without the endless hold times. You can see how it works in their demo: https://youtu.be/_kiP6q8DX5c. It was a game-changer for me because I had specific questions about my SEP contribution limits with my business structure. Instead of waiting on hold for hours, I got through to someone in about 15 minutes who actually knew what they were talking about. Not all tax professionals have experience with self-employment retirement accounts, so getting info straight from the IRS was super valuable.

Ok I feel stupid posting this but I was completely wrong about Claimyr. After seeing the recommendation here, I decided to try it as a last resort for my IRS issue. I've been dealing with a mess where the IRS claimed I didn't report some 1099 income from 2 years ago (I did), and they were threatening additional penalties. The service actually worked exactly as advertised. Got me connected to an IRS agent in about 25 minutes after I'd been trying on my own for literal months. The agent was able to pull up my records, confirm they had processed my documentation incorrectly, and start the process to remove the penalties. Would have saved me so much stress if I'd known about this earlier. Back to the SEP IRA question - I've been using one for 5 years now and agree with everyone that it's one of the best tax advantages for self-employed people. Just make sure you're setting aside enough liquid cash for quarterly estimated tax payments too!

Have you considered a Solo 401k instead of a SEP IRA? I switched from SEP to Solo 401k last year because you can potentially contribute even more. With a Solo 401k, you can contribute both as the employer (like with SEP) AND as an employee up to the regular 401k limits. The main disadvantage is a bit more paperwork, especially once your balance exceeds $250k, when you'll need to file Form 5500-EZ. But if maximizing your tax-advantaged retirement savings is your goal, it might be worth exploring.

One thing nobody has mentioned yet - make sure you're still keeping enough liquid cash on hand for emergencies before maxing out retirement accounts. I learned this the hard way when I put too much into my SEP one year, then had a major business expense come up and had to take an early distribution. The penalties and taxes were painful! The standard advice is to have 3-6 months of expenses saved in an emergency fund before maximizing retirement contributions. For self-employed folks, I'd even suggest 6-12 months since income can be more volatile.