By: Tatum Perez, Esq.
If you are self-employed and earning a strong income, especially from Schedule C work (freelance, consulting, small business), choosing the right retirement account is crucial. It becomes even more important as your earnings approach or exceed the income limits for Traditional IRA and Roth IRA contributions.
Many high earners miss valuable tax-saving opportunities simply because they commit too early in the year without knowing what their final income will be. Here is a practical guide to help you decide whether to contribute to a Roth IRA, a Traditional IRA, or a SEP IRA, and how to maximize your tax advantages.
Know Your Basic Options
Traditional IRA
Offers an immediate tax deduction and tax-deferred growth.
Deduction phases out at higher incomes if you or your spouse are covered by a retirement plan at work.
Roth IRA
Funded with after-tax dollars; grows tax-free.
Contributions are phased out at higher income levels.
SEP IRA
Allows much larger retirement contributions (up to $69,000 for 2024) based on your net business income.
Great for self-employed individuals, but more complex if you have employees other than yourself or your spouse.
2025 Income Limits to Know
Traditional IRA deduction phaseout (if covered by a workplace plan):
Single: Starts at $77,000
Married Filing Jointly: Starts at $123,000
Roth IRA contribution phaseout:
Single: Starts at $146,000
Married Filing Jointly: Starts at $230,000
If your income is above these thresholds, your ability to deduct a Traditional IRA contribution or make a Roth IRA contribution may be limited or even eliminated for that tax year.
How to Make Smarter Contribution Choices During the Year
If your income is under the IRA or Roth phaseout limits:
Prioritize Roth IRA contributions if you expect higher taxes in retirement due to multiple sources of income, such as a pension or taxable investments.
If you can deduct a Traditional IRA, that may save you money immediately.
If your income is too high for a deductible Traditional IRA, but you can still contribute to a Roth IRA:
Prioritize Roth IRA contributions.
If your income is too high for both Roth and Traditional IRA deductions:
Open and fund a SEP IRA to make a larger deductible contribution.
Consider a Backdoor Roth IRA (contact us first to avoid pro-rata tax traps).
If you have significant Schedule C (self-employed) income:
Maximize your SEP IRA contribution.
Typically, you can contribute 20% of your net income after deducting self-employment taxes, up to $69,000 for 2024.
Why SEP IRAs Are Powerful for High Earners
Example:
You earn $180,000 in 1099 (self-employment) income.
After expenses and self-employment tax adjustments, you contribute $36,000 to a SEP IRA (20% of net income).
If you are in the 32% tax bracket, that contribution could save you federal income taxes immediately.
Plus, making a large SEP IRA contribution could lower your taxable income enough to qualify for other deductions or credits you thought you were phased out of!
Another bonus: You can contribute to a SEP IRA all the way up to your tax filing deadline (including extensions), giving you flexibility even after the calendar year ends.
Practical Tips to Stay on Track
Update your income estimate quarterly. Adjust your retirement contribution plan if you start approaching phaseout limits.Open both a SEP IRA and a Traditional IRA early. This gives you the flexibility to choose the best option later.If your income is very high, consider a Solo 401(k). It allows both employee deferrals and employer contributions for even greater savings.
Common Mistakes to Avoid
Forgetting to adjust for self-employment tax before calculating SEP contributions.
Missing the SEP IRA contribution deadline (especially if you do not file a tax extension).
Doing a Backdoor Roth IRA incorrectly and triggering unexpected taxes.
Assuming you “can’t” contribute to an IRA at all once income exceeds the threshold (SEP IRAs and Solo 401(k)s remain excellent options).
Quick Reference: What to Do Based on Income
Under $77,000/$123,000: Consider a deductible Traditional IRA or Roth IRA.$77,000-$146,000 (single)/$123,000-$230,000 (married): Roth IRA may still be an option.Above $146,000/$230,000: Maximize SEP IRA or consider Solo 401(k). Explore Backdoor Roth carefully.
Smart planning your retirement contributions throughout the year — not just in April — can help you keep more of your hard-earned money and build your retirement savings more efficiently.
If you have any questions, contact Tatum Perez at [email protected] (305) 665-0860 .
About Greenspoon Marder Greenspoon Marder LLP is a full-service law firm with over 225 attorneys and more than 20 office locations across the United States. With operations from Miami to New York and from Denver to Los Angeles, our firm attracts some of the nation’s top talent in key markets and innovation hubs. Our core practice areas include Real Estate, Litigation, and Transactional Services, complemented by the capabilities of a full-service firm. Greenspoon Marder has maintained a spot on The American Lawyer’s Am Law 200 as one of the top law firms in the U.S. since 2015, and our goal is to provide exceptional client service by developing a thorough understanding of each client’s business needs and objectives in order to provide strategic, cost-effective solutions.
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