Understand Contribution Limits
Each of the three major self-employment retirement plans has its own contribution limit — the maximum amount of money you can invest every year. The IRS updates these numbers annually, but here are the figures for tax year 2013.
As we said earlier, the SEP IRA is the easiest to manage. One reason is its fixed contribution limit, which is 25 percent of "net earnings from self-employment" up to $51,000 [source: IRS]. Net earnings means gross income minus any "ordinary and necessary" expenses related to running the business [source: IRS]. Since you don't have to make any SEP IRA contributions until Tax Day, you can see what 25 percent looks like for the year and decide how much you want to put toward retirement.
There are two separate contribution limits for the Solo 401(k). First, there's a fixed limit of $17,500 a year, or up to $23,000 a year if you are 50 or older. Then you can make additional contributions of up to 25 percent of "earned income" from the business for a maximum contribution limit of $51,000 [source: IRS]. Note that earned income is not the same as "net earnings from self-employment." To calculate net earnings, you need to subtract both self-employment taxes and any 401(k) contributions you made for yourself [source: IRS].
The cap on SIMPLE IRA contributions is fixed $12,000 in 2013 plus $2,500 if you are 50 or older [source: IRS]. The extra money is called a "catch up" contribution, since it helps people stash away more money as they near retirement age. Remember, if you have employees, you are also required to contribute either a fixed 2 percent of their salaries or match their contributions up to 3 percent of their compensation.
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