SEP-IRAs: Retirement for Self-Employed Individuals

You may know that Individual Retirement Accounts (IRAs) are a good option for individuals to want to save for retirement, but don’t have access to a employer-sponsored 401(k)-type plan. However, if you are self-employed there is another option to consider — a simplified employee pension, or SEP-IRA — which offers additional benefits designed for individual practitioners seeking to save for retirement.

A SEP-IRA has much higher contribution limits than regular IRAs. Plus, they are easy to set up. Any size business can open a SEP-IRA. Only the employer can make contributions on behalf of employees. So, if you’re self-employed and you’re the only employee of your business, you make contributions to the plan on your own behalf.

SEP-IRA Basics for Self-employed Individuals:

  • You can open a SEP-IRA with a bank or other financial institution. You will need to fill out a form for an IRS-approved “prototype SEP plan” or complete IRS Form 5305-SEP. You don’t have to file the form with the IRS. It simply documents that you established the plan.
  • SEP-IRAs follow Traditional IRA rules on how they are taxed. Your contributions are tax-deferred until you withdraw them in retirement.
  • You can contribute up to 25 percent of your net earnings or $53,000 for tax year 2015, whichever is less.
  • You can choose among investment options. Typically, banks offer certificates of deposit (CDs) or money market funds. Other institutions, such as brokerages, life insurance companies and credit unions, offer stocks, bonds, mutual funds and other options.
  • You can roll your SEP-IRA into another SEP-IRA or Traditional IRA. If you take a job that includes a 401(k)-type plan, you can roll your SEP-IRA into the plan, as long as it accepts rollovers.
  • If you hold on to your business and take a second job that offers a 401(k)-type plan, you can participate in both.
  • You can’t take a loan from your SEP-IRA. If you need access to the money before you reach age 59½, you can take a withdrawal, but you’ll typically pay ordinary income tax and a 10 percent penalty.

You can avoid the 10 percent penalty on an early withdrawal under certain circumstances which include:

  • College expenses
  • First-time home purchase (up to $10,000)
  • Certain medical expenses
  • Total and permanent disability
  • If you’re a reservist called to active duty
  • You inherit an IRA
  • You are receiving distribution in the form of an annuity
  • You’ll need to start taking distributions when you reach age 70½. The financial institution that holds your account will notify you when you need to start making withdrawals.

Take Action!

  • Make a plan for your retirement. Be specific and set realistic goals to help make retirement attainable.
  • If you’re self-employed, consider a SEP-IRA for your retirement savings, rather than a Traditional or Roth IRA. You’ll benefit from higher contribution limits.
  • You can open one through a bank or other financial institution.
  • Understand the investment options available and decide if they are right for you before opening your account. Since SEP-IRAs follow the rules for Traditional IRAs, see our related article on IRAs.
  • Learn more about SEP-IRAs by reading “SEP Plan FAQs” on the IRS website.

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