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Got Side Income? Pay Fewer Taxes And Juice Your Savings At The Same Time

If you have freelance or self-employment income, you must know about this specialized investment account that lets you save a ton more for retirement than an IRA or even a 401(k). And, since you can deduct contributions, you’ll save on taxes this year, too.

A SEP IRA can help you save freelance income and reduce your tax bill.

Comedian Jay Leno is a master of the side hustle. Jay has said “I live on the money I make as a comedian, and I put all the TV money in the bank.”

For years, we all knew Jay as the host of Tonight Show, but to him, that was his side gig! He knew the television business is fickle, so he lived as if that source of income could dry up at any time.

Smart guy.

There are lots of reasons I recommend finding freelance work or another side hustle. It’s a tremendous way to pay off debt like I did. It’s also the best way to amplify your savings.

If you can get into a position where you can live off your day job and save 100 percent of money you earn on the side, you can reach your savings goals faster, whether it’s to buy a new home, pay for your wedding, or achieve financial freedom as early as possible.

And if it’s financial freedom you’re after (you know, “retirement”, otherwise known as the day when work becomes optional rather than necessary), freelance income can work even harder for you thanks to a retirement savings option for the self-employed.

Hopefully you already know about IRAs, or individual retirement accounts. These savings accounts, available to everybody, are the best way to start saving for financial freedom. You can choose to contribute money into a traditional IRA and take a tax deduction on the contribution this year or, better yet, contribute after-tax dollars into a Roth IRA which lets you withdraw your money (and interest) tax-free down the road.

For big earners and savers, however, the IRA has its limits. Literally.

In 2016, savers under 59 ½ can only contribute up to $5,500 into an IRA. And if your income exceeds certain amounts, you’re restricted on how much you can put into a Roth IRA – or excluded altogether.

Enter the SEP IRA.

A SEP, or “simplified employee pension”, is a kind of individual retirement account designed for very small businesses and the self-employed.

The good news? You can participate in a SEP IRA if you have any amount of income from self-employment or freelancing, even if you have a day job.
Setting up a SEP IRA is as easy as any other investment account, and any good online broker can manage the account.

SEP IRA contributions are tax-deductible (there’s no option for post-tax or Roth contributions).

Like a regular IRA, you have until April 15 to open a SEP IRA and make contributions for the prior tax year.

But wait, I’ve saved the best for last.

The biggest advantage a SEP IRA is that you can contribute much more than $5,500 each year. As of 2016, you can contribute up to 25 percent of your self-employment income to a maximum of $53,000. Read the full IRS contribution rules here.

And remember, that money is tax-deductible, so the more you contribute, the fewer taxes you pay this year.

I opened a SEP five years ago to invest some of the money I earned blogging while I was still at a day job. Today it’s grown into my primary retirement account.

Full-time freelancers have another option, the Solo 401(k). Solo 401(k)s have a bit more paperwork involved with them but may offer participants some advantages over a SEP, like the ability to make Roth (post tax) contributions. If you are self-employed, a quick visit with a CPA would be valuable in choosing between the two plans.

Do you save your side income? How have you put it to work?

Read more:


Published or updated on March 26, 2014

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About David Weliver

David Weliver is the founding editor of Money Under 30. He's a cited authority on personal finance and the unique money issues we face during our first two decades as adults. He lives in Maine with his wife and two children.


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  1. Justin says:

    My job does not allow enough time for me to work a side hustle, but there is a decent amount of overtime and other premium pay available if I want it. I count this income, over and above my standard 40 hrs, as “side income” because I do not need it to live on. This does not allow me to open a SEP, but I am in the process of attempting to have payroll set up some sort of allowance that deposits my regular pay into one account and anything over that into another. The only bummer is that my TSP contributions and match are calculated off base salary. I would love for them to take the 15% contribution off total earnings every check, but they do not allow that!

  2. Sara says:


    Could you offer any more details on the SEP-IRA plan? Are contributions tax-deductible even if you don’t itemize deductions? Are contributions free of both self-employment taxes and regular income taxes? Thanks!

    • David Weliver says:

      Yes on both counts: Money that you put into a SEP reduces your adjusted gross income (AGI) dollar for dollar, so it’s true even if you don’t itemize and it reduces self-employment tax as well as income tax.

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