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Like other types of individual retirement arrangements, investment earnings in a SEP-IRA grow tax-deferred until withdrawn.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.

While we believe the external websites listed above are reputable, we neither endorse them nor can vouch for their complete accuracy.

AC: 0415-7721

Leave a comment: