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Don’t Overlook a Roth IRA If You Are Self-Employed

A significant advantage of saving for the future in a retirement account is the included tax benefits. Contributing post-tax money to a Roth IRA will result in tax savings. Once you’ve reached the age of 59 ½, you can withdraw your contributions and earnings without paying additional income tax. However, it’s important to note that your Roth IRA account will have to be open for more than five years.

Many individuals who are self-employed and financially well-off may have overlooked the idea of a Roth IRA for the following two reasons:

  1. You may have assumed your income is too high to qualify for Roth contributions.
  2. You may have concluded that since you’re now in a higher tax bracket than you’ll be in retirement, it’s not a viable option. This may leave you with making maximum deductible contributions to a simplified employee pension (SEP) plan, solo 401(k), or a defined contribution or defined benefit Keogh plan.


Although you may believe your income is too high or that a deductible plan is a preferred choice, it’s time to reconsider. If you’re interested in building a substantial federal-income-tax-free retirement fund, a Roth IRA may be precisely what you’re looking for even if you have an alternative retirement plan.

If you believe your income is too high to qualify for a Roth IRA, think again.

A significant amount of self-employed individuals qualify for Roth IRA contributions. Consider this: a self-employed individual’s modified adjusted gross income is likely to be considerably lower than the MAGI of another individual who is in similar circumstances and who is an employee. The reason for this is due to the great deductions successful self-employed taxpayers have to pay.

These deductions are subtracted in arriving at MAGI. They include but are not limited to:

  • Expenses incurred in the business such as rent, office space in the home, or a laptop
  • Contributions to a tax-deferred retirement plan
  • Health insurance premiums
  • The write-off for 50% of self-employment tax

This may come as surprising but a self-employed person, in fact, can have a high gross income while having a very low MAGI.

If you’re pursuing a deductible plan, know you have other options.

There are more Roth IRA Advantages than you may be aware of. Below, we list more Roth IRA benefits.

You can contribute after the age of 70 ½

Investors with traditional IRA are forced to stop making contributions when they turn 70 ½. This results in the investors being forced to take distributions and begin paying taxes on that money.

With Roth IRA, there are no required minimum distributions. A clear benefit of this is that you can live to 120 without ever touching your Roth IRA. Additionally, anyone with earned income can keep adding to their Roth IRA account without age restriction.

Your heirs’ benefit

If you’re thinking down-the-line, then you may want to consider the heir benefits of a Roth IRA. Savers with enough accounts are able to leave their beneficiaries tax-free income that can be used over their lifespan.

High-earners can qualify in multiple ways

High-income earners can make a non-deductible contribution to a traditional IRA and then convert it to a Roth. It’s important to note that the IRS requires you to take into consideration all of your pre-tax holdings when identifying the tax liability of a conversion.

The takeaway

You are able to make Roth IRA contributions if you have cash left over after making the maximum deductible contributions to a tax-deferred retirement plan. Contribute to both for optimum benefits.

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