SEP IRAs: A Retirement Savings Option as You Begin a New Career

May 29, 2015 - Mark D.

After a long career in public service, you see change on the horizon. Some would call it retirement, but not you. You've worked hard to get where you are, and you are confident the skill set you have is in great demand. Or, perhaps, being your own boss is something you've dreamed about. One of the decisions you'll need to make: How will you continue to save when you may have 20 to 30 more productive years after you leave government?

One option could be savings from a small business. About one in 10 adults in the United States — 22 million people — own a small business, according to the U.S. Census Bureau; and 80 percent of new start-ups are by individuals who do so with less than $100,000 in capital, per the Small Business Administration (SBA).

Business ownership appears to be a sweet spot for many middle age folks. According to a 2014 SBA report, they are the most likely group in the U.S. to own a small business. In fact, people age 50 or older represented 50.9 percent of small business owners in 2012, up from 46 percent in 2007.

If you are considering joining the ranks of small business owners after you leave public service, setting up a new retirement plan might not be the first thing you think of. But it can be an important consideration that could help you build more retirement security to complement what you've already accumulated in your public sector retirement accounts.

One option is to set up a Simplified Employee Pension IRA, or SEP-IRA. It can be a smart move for your new endeavor, and, if your spouse or adult child has a business of their own, they too can establish a SEP-IRA.

While you may already have a Traditional or Roth IRA, which is a great way to supplement your savings, the SEP-IRA is different. Traditional and Roth IRAs, for example, are set up by an individual to make contributions from wage earnings reported on your W-2 while SEP-IRAs are established by a small business and contribution limits are based on your business compensation. A SEP-IRA also offers higher contribution limits.

Some highlights about SEP-IRAs:

2015 Contribution Limit: The lower of $53,000 or 25% of compensation
Required Minimum Distributions at 70½ Yes
Tax-deferral until withdrawal Yes
Early withdrawal penalties Yes
Required contributions No
Rollover SEP-IRA assets into another retirement plan Depends
Owner + employees eligible for plan Yes

To learn more about SEP-IRAs, see Publication 560 at and the DOL's SEP Web page.

How do you plan to supplement your retirement savings while pursuing your dream?

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