Advertiser Disclosure
X

Advertiser Disclosure: The credit card offers that appear on this site are from credit card companies from which MoneyCrashers.com may receive compensation. This compensation may impact how and where products appear on this site, including, for example, the order in which they appear on category pages. MoneyCrashers.com does not include all credit card companies or all available credit card offers, although best efforts are made to include a comprehensive list of offers regardless of compensation. Advertiser partners include American Express, Chase, U.S. Bank, and Barclaycard, among others.

By

Views

52.7K

Dig Deeper

23,576FansLike
19,233FollowersFollow
37,091FollowersFollow

Become a Money Crasher!
Join our community.

What is a SEP IRA Retirement Account for Small Business Owners – Rules & Contribution Limits

Views

52.7K

In the past, we’ve talked about the traditional 401k, Roth 401k, Roth IRA, and traditional IRA. We must have hit them all by now, right? Well, if you’re a small business owner or you are self-employed, there’s another retirement fund option that you need to consider: the SEP-IRA.

When I started my own business, one of my goals was to save more for retirement, but the other plans’ costs were too excessive. After doing research, I quickly found that the best option was the SEP-IRA, which offered me a popular low-cost alternative.

Sign up for an account at Simple by 7/31/19 4:59 PM PT and get up to a $500 bonus and 2.02% APY (with qualified activities).

SEP-IRA Background and Tax Treatment
Intended as an alternate retirement plan for small business owners and the self-employed, the SEP-IRA (Simplified Employee Pension Individual Retirement Account) allows you to put aside money for yourself and your employees even if you or they are already participating in a 401k or other retirement plan. A few quick aspects of the plan to consider:

  • There are no significant administration costs.
  • Employees cannot contribute to their SEP accounts – only the employer can contribute.
  • Anyone who is 21 or older, has earned at least $500 from the company in the current year, and has worked for the company at least 3 of the past 5 years is considered an employee and must receive their own SEP-IRA account with contributions from the employer. But even before the employee has reached these barometers, the employer can still choose to set up employees with SEP accounts.
  • Contributions to the SEP-IRA account are tax deductible. Unlike the Roth IRA, any investment earnings will be taxed as ordinary income upon withdrawal.

Many of the traditional firms offer SEP-IRAs, such as Fidelity, T. Rowe Price and Vanguard, so you may be able to open an account with a company with which you are already a customer.

How much can you contribute?
You determine the percentage of compensation that you would like to put into your and your employees’ accounts, up to 25% of compensation (20% for unincorporated businesses). However, you and your employees must all receive the same percentage –  so no giving yourself a bigger cut! Each person may receive up to $49,000 in contributions for the year, although this limit may go up in future years. For self-employed businesspeople, you can contribute 25% of net profits adjusted for the self-employment tax, or approximately 18.6% of net profits. You can use this IRA reference guide to calculate the exact amount you can contribute.

When can you contribute?
Contributions can be made at any point during the year and up until the business’ tax returns are due – April 15th for most of us. So if you didn’t have a great year, you can wait until April 15th to come up with the cash to contribute. The deadline for corporations is March 15th or the normal corporate tax filing date. However, if you’re self-employed and didn’t make any profit, you can’t contribute anything to your SEP-IRA for that year. However, you can continue to put money into a traditional or Roth IRA.

When can you withdraw the money?
As with many other retirement plans, you must wait until age 59 1/2 in order to withdraw without penalties. You must begin required distributions at age 70 1/2. Similar to the traditional IRA, some exceptions to the penalties exist, such as medical or educational expenses, or purchasing a home.  Your contributions and the earnings on those contributions are taxed at the time that you withdraw them, at whatever current tax rates exist.

Why should I have an SEP-IRA?
An SEP-IRA is a wonderful tool for the self-employed, especially if your business isn’t very big. In fact, its low cost and simplicity make it perfect for even a very small business. You can contribute over the year or you can make a lump sum payment at any time. The tax advantages are also great – you’ll get to deduct any contributions from this year’s income and save tax-free.

This is an unbeatable deal for any self-employed person. If you have a flush year, you can contribute whenever you have the money and get a great tax deduction. I like to contribute a set percentage of my profits in any month where I turn a profit. It’s small amounts, but they add up over time, and if I have a great year and have maxed out my traditional IRA, I can set aside even more in my SEP-IRA. Plus, most plans have low to no fees, and with all of my contributions in lifecycle funds, I can spend time working on my business instead of rebalancing my portfolio.  Of course that means bigger contributions down the line. There’s never a bad time to start investing and saving for your retirement.

If you’re a small business owner or are self-employed, do you have any experience investing in a SEP IRA?

Kira Botkin
Kira is a longtime blogger and serial entrepreneur who enjoys gardening, garage sales, and finding stray animals. She lives in Columbus, Ohio, where football is a distinct season, and by day runs a research study for people with multiple sclerosis. She hopes that the MoneyCrashers team can help you achieve your goals and live a great life.

Next Up on
Money Crashers

Amazon Prime Day Coming Soon

Amazon Prime Day 2019: How to Get the Best Deals

What is Amazon Prime Day? It's a day-long (or longer) extravaganza of exclusive deals for Amazon Prime members. During this sales-fest, the world’s biggest retailer will slash prices on a wide variety of items — some of them by as much as 50%. To get the most out of Prime Day, it pays to plan ahead — researching deals, deciding what to buy, and keeping track of when sales pop up. By preparing for Prime Day in advance, you can get the most for your money with minimal hassle.
Six Figure Income Jobs

11 High Paying Six-Figure Jobs Without a College Degree

While many aspire to go to college after high school, not everyone can, or should, head straight to university. Family issues, a lack of...

Latest on
Money Crashers

Sign Up For Our Newsletter

See why 218,388 people subscribe to our newsletter.

What Do You Want To Do
With Your Money?

Make
Money

Explore

Manage
Money

Explore

Save
Money

Explore

Borrow
Money

Explore

Protect
Money

Explore

Invest
Money

Explore