What is a SEP IRA?

SEP IRAs are adopted by business owners to provide retirement benefits for themselves and their employees. To help focus our conversation, we will only focus on those who are in business for themselves and operate as a one-man or one-woman show.

A SEP IRA stands for Simplified Employee Pension Individual Retirement Arrangement. With this account, you can defer taxable income to invest for your retirement. The money invested in this account is invested on a pre-tax basis and will grow tax-deferred until distributions are taken.

The best feature of a SEP IRA is its flexibility. A SEP IRA can be a tool where you can manage your income and tax liability. For example, if your net income turns out to be higher than expected, you can make a larger contribution and trim your tax bill. If you have a lower than expected income for the year, you can reduce or not contribute at all to this account. Even better the deadline for establishing your SEP IRA and making contributions is the filing deadline for the employer’s tax return (This includes extensions).

The amount of money you can save in these accounts on a yearly basis is amazing! The total contribution to a SEP IRA should not exceed the lesser of 25% of income (20% for self-employed individuals) and $54,000 for the tax year (2017). Another benefit of a SEP IRA is the low administrative burden. With a SEP IRA there is limited paperwork and no annual reporting to the IRS.

Another plus of using a SEP IRA is if you’re building your business on the side. While you are still working for an employer, who’s sponsored 401(k) plan you contribute to, you can make contributions to a SEP IRA and it will not interfere with your employer’s plan. This makes this account perfect for those who call themselves “employee-prenuers”.

To provide a balanced assessment of a SEP IRA, here are some things to keep in mind before you invest. SEP IRAs are subject to the typical limitations imposed on Traditional IRAs.

• If a participant makes a withdrawal before age 59½, generally there is an additional 10% tax penalty.
• Withdrawals are taxable in the year received.
• At age 70 ½, Required Minimum Distributions (RMDs) will have to be taken based on the IRS tax tables.

I hope you see that if you are a solo entrepreneur a SEP IRA should be in your toolbox when you are planning for retirement. If you want more information about investing in a SEP IRA, please contact me using the signature information below.