How freelancers can save last-minute tax bills
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When I wrote about the Solo 401(k) a few weeks ago (the investment account I used to pocket about $40,000 in business income in 2021, wiping out the top sum of my taxable income ), I had a deluge of DMs asking if it was too late to open a Solo 401(k) retroactively for 2021. Unfortunately, my friends, the 2021 deadline was December 31st.
But don’t be afraid! Its cooler older sister, the MS IRA, is still fair game.
The SEP IRA allows you to defer the same 20% of net business income as your own “employer” and does not require an EIN or the documents that Solo 401(k) do. The best part? You can open one now, in 2022, and contribute to it for 2021.
This obviously assumes you have some cash lying around, but it might be a good idea to take money you’d otherwise have contributed to a brokerage or other investment account this month (and the next ), and put it in a SEP IRA instead, for 2021 deferrals.
The money you contribute grows tax-deferred, which means if you owe money this year, contributing to a SEP IRA could help ease the pain on April 18 (I calculated that my tax bill is about $12,000 lower due to my Solo 401(k) contribution).
One caveat: the SEP IRA is technically a “traditional IRA” with no income limit, so if you’re leveraging the “Backdoor Roth IRA” strategy, having a SEP IRA will make that more difficult.
Katie Gatti Tassin is the founder of Money with Katie. Sign up now for his all-new mini-course on all things travel rewards credit cards.