Understanding Retirement Savings Options: SEP-IRAs

May 29, 2015 - Mark D.

There are many available options to save for retirement and they can be overwhelming. One option is a Simplified Employee Pension Individual Retirement Arrangement (SEP-IRA).

See SEP IRAs: A Retirement Savings Option as You Begin a New Career for more about how this savings option could work for an individual or business.

A SEP-IRA is a retirement account designed for:

  • Self-employed individuals
  • The sole employee of a small company
  • Corporations with 25 or fewer employees

In a SEP-IRA, an employer makes contributions on behalf of employees (yourself if you are self-employed). In 2015, this amount can be as much $53,000, which is much higher than the limits for other types of IRAs. However, the amount cannot be more than either 25 percent of compensation reported on either an employee's W-2 or 25 percent of self-employment income.

SEP-IRA contributions are flexible and the contribution percentage can be changed at any time and may be skipped for a year. SEP-IRA contributions are generally tax deductible from either the self-employed person's personal income taxes or the employer's business return.

Like other types of individual retirement arrangements, investment earnings in a SEP-IRA grow tax-deferred until withdrawn. Withdrawals after age 59½ are taxed as ordinary income. Withdrawals prior to age 59½ may incur a 10 percent federal tax penalty as well as income taxes.

Once you create a SEP-IRA, your business is considered a retirement plan sponsor. Typically, SEP-IRA plans have multiple investment options such as mutual funds that invest in stocks, bonds, or a combination of both.

You have the ability to do a tax-free direct rollover of your SEP-IRA assets into a 457 retirement plan if you decide to give up your business and go back to work for a government entity that sponsors a 457 plan. And, you can do the reverse … and roll over your 457 plan assets from a former government employer into your SEP-IRA.

For more information about SEP-IRAs, see IRS Publication 560 Retirement Plans for Small Business at www.irs.gov. 

You can also read When Does an IRA Make Sense for information on traditional and Roth IRAs.

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