Are you self-employed or own a business and looking for an alternative to the traditional IRA or 401(k)? Find out if a SEP IRA is right for you.
A Simplified Employee Pension Individual Retirement Account (SEP IRA) is an alternative IRA used for retirement savings. SEP IRAs allow business owners to set aside up to 25% of an employee’s income for their retirement account and don’t have many of the upfront costs and fees that traditional IRAs have.
A SEP IRA can be set up for business owner and their employees, making this a very attractive alternative for business owners looking to access the company-wide benefits of a 401(k) inside an IRA.
SEP IRA accounts offer the same tax advantages and investment options as other IRAs.
SEP IRAs are designed for self-employed individuals and small-business owners seeking an investment vehicle for tax-deferred retirement savings. To meet the eligibility requirements for a SEP IRA, the following must apply:
Employers must contribute on behalf of their employees to a SEP IRA because they are considered eligible plan participants by the IRS.
Based on IRS rules, employee contributions must match an equal percentage of compensation given to the business owner.
Additionally, employees can be eligible for SEP IRA participation if they are at least 21 years of age, have worked for an employer for three of the past five years, and have made the IRS’s current minimum income requirement ($650 in 2022).
SEP IRAs offer unique benefits for both business owners and self-employed workers. The SEP IRA is generally considered a top investment option for someone who desires flexibility in the amount they can contribute annually.
The high limit for annual contributions also makes the SEP IRA an attractive option for someone with ambitious retirement goals.
Pros:
These accounts offer flexibility. While SEP IRAs have high contribution limits, there’s no need to commit to contributing every year.
Cons:
Contribution limits differ based on your status as either an employer or employee. As of 2022, employers can either contribute up to 25% of an employee’s total compensation or $61,000.
If you’re a self-employed person, contributions are generally limited to 20% of net income.
Something that makes SEP IRAs unique is that employees can’t defer salary for contributions. For the 2022 tax year, employees are permitted to make contributions of up to $6,000. That jumps to $7,000 for employees over the age of 50.
When opening a SEP IRA for more than one person, the account holder can choose from various mutual funds. Other investment types aren’t permitted with a SEP IRA like they are with a self directed IRA.
However, one-person SEP IRAs actually provide a much wider range of investment options. Account holders of one-person SEP IRAs can diversify using mutual funds, exchange-traded funds (EFTs), individual stocks, bonds, and CDs (certificates of deposit).
One of the big draws of the SEP IRA is that it doesn’t have the start-up and operating costs of conventional retirement plans. There is no cost to open an account. However, other fund fees, account fees, and brokerage commissions may apply.
SEP IRAs also come with tax benefits. For employers, all contributions made are tax deductible. For employees, there is the benefit of growling tax-deferred earnings.
While SEP IRAs and Roth IRAs both offer tax benefits upon retirement, these two options come with tax tradeoffs that investors should know about. For example, SEP IRA offers tax-deferred growth on your investment. A Roth IRA provides tax-free growth and withdrawals.
Another difference between SEP and Roth IRAs is that SEP IRAs allow employers to add employees to their accounts. Roth IRAs are strictly for self-employed workers.
SEP IRA contribution limits are higher than limits for traditional IRA contributions. With the difference being $61,000 versus $6,000, this is no small detail for people with big retirement plans.
It’s also interesting to compare the SEP IRA with the Savings Incentive Match Plan for Employees or SIMPLE IRA when deciding between employer-sponsored retirement plans. While only employers can contribute to the SEP, the SIMPLE IRA allows employees to contribute using elective deferrals that remove money from their paychecks.
Additionally, SIMPLE IRA contributions are capped at $14,000. While that limit is lower than the SEP limit, SIMPLE IRAs do allow for a “catch-up” of $3,000 for employees over age 50.
Opening a SEP IRA is considered easy. Both employers and self-employed workers can create a formal written agreement using IRS Form 5305-SEP. It’s generally recommended to collaborate with an account provider like Horizon Trust.
For employers, the next step is to give all eligible employees information about the SEP IRA. Finally, accounts can be set up for each employee online with a custodian like Horizon Trust on our website or by talking to a sales representative.
Legal Disclaimer: Horizon Trust Company is an independent passive Custodian and is not associated or affiliated with and does not recommend, promote or advise any specific investment, investment opportunity, investment sponsor, investment company or investment promoter or any agents, employees, representatives or other of such firms or entities. Investments are not FDIC Insured, offer no bank guarantee and may lose value.
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Once you hit “Continue” you are leaving the horizontrust.com site. The information and links on the website (“Platform”) you are about to visit are not part of, affiliated with, under the control of, or the responsibility of Horizon Trust Company (“Horizon Trust”).
Once you hit “Continue” you are leaving the horizontrust.com site. The information and links on the website (“Platform”) you are about to visit are not part of, affiliated with, under the control of, or the responsibility of Horizon Trust Company (“Horizon Trust”).
Once you hit “Continue” you are leaving the horizontrust.com site. The information and links on the website (“Platform”) you about to visit are not part of, affiliated with, under the control of, or the responsibility of Horizon Trust Company (“Horizon Trust”).
Once you hit “Continue” you are leaving the horizontrust.com site. The information and links on the website (“Platform”) you about to visit are not part of, affiliated with, under the control of, or the responsibility of Horizon Trust Company (“Horizon Trust”).
Once you hit “Continue” you are leaving the horizontrust.com site. The information and links on the website (“Platform”) you about to visit are not part of, affiliated with, under the control of, or the responsibility of Horizon Trust Company (“Horizon Trust”).
Once you hit “Continue” you are leaving the horizontrust.com site. The information and links on the website (“Platform”) you about to visit are not part of, affiliated with, under the control of, or the responsibility of Horizon Trust Company (“Horizon Trust”).
Once you “Continue” you are leaving the horizontrust.com site. The information provided by the investment sponsor and/or links on the website (“Platform”) you visit are not part of, affiliated with, under the control of, or the responsibility of Horizon Trust Company (“Horizon Trust”).
Once you “Continue” you are leaving the horizontrust.com site. The information provided by the investment sponsor and/or links on the website (“Platform”) you visit are not part of, affiliated with, under the control of, or the responsibility of Horizon Trust Company (“Horizon Trust”).
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Once you hit “Continue” you are leaving the horizontrust.com site. The information and links on the website (“Platform”) you about to visit are not part of, affiliated with, under the control of, or the responsibility of Horizon Trust Company (“Horizon Trust”).
Once you hit “Continue” you are leaving the horizontrust.com site. The information and links on the website (“Platform”) you about to visit are not part of, affiliated with, under the control of, or the responsibility of Horizon Trust Company (“Horizon Trust”).