Dear Liz: How much can I contribute to a simplified employee pension IRA each year? I am self-employed, selling residential real estate. My income varies each month.
Answer: If you’re self-employed, you can contribute 25% of your earned income or $49,000 — whichever is less — to a SEP for 2010. Earned income is defined as your gross income from your business minus allowable business deductions, including contributions to the SEP. (You’re considered self-employed if you work for yourself and your business is not incorporated. Otherwise, you would need to follow somewhat different rules to determine compensation.)
A SEP is one of the easiest ways for the self-employed to save for retirement, because you don’t have to commit to a certain funding level and you don’t have the potentially expensive reporting or actuarial requirements that often come with other plans. You should read IRS Publication 560, Retirement Plans for Small Business, and talk to a tax pro to make sure you get the details right.