Retirement Plans for self-employed: SEP IRA

As promised, here is some information about retirement plans for the self-employed. There are a number of plans, but the most popular and easiest is the SEP IRA or the Simplified Employee Pension – Individual Retirement Account plan. That’s the one we’ll talk about today.


First, if your plan is not already in place, you’ll have to do a little bit of paperwork. The IRS has a standard plan – a fairly simple one-page form to fill out.  You can go to a fund company, broker, bank, or insurance company to set it up and they should provide you with that form. Be sure to provide your employees a copy of the plan agreement and disclosure form. If you have questions, give me a call.


Once your plan is in place, if you’re self-employed and have no employees, you can contribute up to 20% of your net self-employment income, up to a maximum of $49,000.


If you do have employees, you must include them in the plan if they’re over 21, earn at least $550 a year, and have worked for you for 3 of the past 5 years. You must contribute to their accounts the same percentage of their income as you contribute to your own. This contribution is tax deductible to you the employer up to $49,000 or 25% of their salary, whichever is smaller.


With a SEP, you (and each of your employees) has their own IRA account to invest how they please (within the options of the fund company, broker, bank, or insurance company that you are working with).  SEP IRAs have several of the same features as Traditional IRAs.  That is, you must start taking distributions from the IRA when you reach age 70 ½ and there are penalties for early withdrawals and excess contributions.  Unfortunately, there are no Roth options in a SEP IRA.


The main advantages of a SEP: 

        After that initial paperwork, no annual reporting is required.  Also, while you do have to contribute on behalf of your employees if you contribute for yourself, your decision to fund the plan or not is up to you each year. 

        You have up until 10/15 of the year following the tax year to fund, if you extend your tax return.

        You can open the plan at the last minute – it does not need to be done during the tax year.

        Recipients are 100% vested in the plan.

        You can make contributions to the plan after age 70 ½ if you have self-employment income.