SEP-IRA, does this make sense?

[freelancerNfulltimer]

I made a previous post about what to do with $20,000 I had saved. Most of that I earned this year from my freelance.

I want the money to be accessible but I was wondering would it make sense to set up a SEP-IRA. Could I put my entire freelance income into a SEP-IRA to avoid paying taxes on it? Based on some research I found you can contribute up to $44,000 per year using the SEP-IRA. Do I still get to indicate this as income on my tax-returns for any mortgages I want to apply for?

Then if I needed to use the money I could borrow from it knowing I'd have to pay myself back in 60 days?

Are there any other places I could put this money to get tax benefits but perhaps borrow against it for longer than 60 days? Is a solo 401k an option? I like the idea of being able to borrow from it and pay myself back but 60 days is a very short repayment term which would limit how much I'd want to put in there.

Sorry if these are basic questions, I don't know much in this area.

If I did borrow from myself for a down payment on a real estate investment do the banks look unfavorably towards that? They ask if any portion of your down payment was borrowed but does it count if you're borrowing from yourself?

[gotaholen1]

Interesting that no one has responded to this.  I am also curious about this.  After researching a bit, it seems that you could contribute up to 25% of your earnings to a SEP ira.  I also have some 1099 income and I am thinking about opening a SEP IRA through Fidelity.  I do not have as much freelance income, but I do have about 3K from 2012 and 10K from 2013 already.

This seems like a pretty good way to put a few thousand dollars away outside of Roth and other IRA contributions.

[projekt]

This would be a good one to ask a CPA. It's complicated by different rules for employees and self employed.

[Chris]

Of the self-employment tax-advantaged retirement options, SEP is the easiest one to use. Basically you open it with a broker, use one of the many SEP-IRA contribution calculators available on the web, then make sure you don't contribute more than that amount. You need to factor in the self-employment tax deduction, so it's not just a straight 25% contribution.

There isn't really much in the way of administration, especially since you have no employees. The main drawback is that the contribution is capped at around 20%, but that's the price you pay for simplicity.

[the fixer]

I have a SEP-IRA from self employment. The contribution limit rules are very confusing to learn thoroughly. Yes, most of the materials from the IRS on SEP-IRAs say 25% is the max employer contribution, but you're both the employee and employer which makes for some very weird rules when you actually get into it. The end result is the effective max is 20% of your net profit from self employment minus the deduction for half the self employment tax.

A SEP-IRA is very easy to set up; aside from opening the account with Vanguard or whomever, you have to fill out one simple IRS form and keep it in case you ever get audited. That's it.

The downsides to a SEP-IRA are the contribution limit and the fact that it's an IRA, so you will have problems doing backdoor Roth contributions if that's something you're interested in. Your other option is an individual 401(k) which I'm looking into this year, but it's much more of an administrative burden. For more, see http://www.bogleheads.org/wiki/Solo_401k_plan

With any of these accounts, MAKE SURE YOU DON'T CONTRIBUTE TOO MUCH. Since your contribution limit depends on business income (which can vary month to month), deducted expenses, and self employment tax, it can be easy to mess up. If you make contributions throughout the tax year, keep them low to make sure you don't put in too much. You can catch up as close to the limit as you want at the end of the year, once you know what your Schedules C and SE are going to look like.

All of this is doable and it doesn't absolutely require a CPA if you take the time to learn the rules and tread carefully.