10 Revealing Questions to Share Benefits of the SEP IRA

6 minutes

Eggs in a basket savings. Photo by 401kcalculator.org
Eggs in a basket savings. Photo by 401kcalculator.org

What is a Sep IRA?

A Sep IRA stands for simplified employee pension plan which allows an employer to have a simplified way to contribute to an employee’s retirement plan. It also allows them to contribute to their own retirement savings.

Contributions are made to an IRA or Annuity IRA for each employee who participates. This is a SEP IRA.

A SEP IRA account is a Traditional IRA and has the same investment, distributions, and rollover rules as a Traditional IRA.

10 Questions

1. What are the best SEP IRA plans?

As SEP IRAs are considered Traditional IRAs by the IRS. And they have to be set up by your employer the clear answer is a Traditional IRA.

This also means that it will have to same rules in regards to contributions, distributions, and tax related benefits. We discussed these in an earlier post.

Also, any plan that you contribute to is a great plan. The point of all this is to show you the light and help you take action.

2. Can I open a SEP IRA?

If your w2 income comes from that employer then you will need to participate in their retirement plan. If they are small enough they may have a SEP IRA plan for you to participate in.

You also can open up your own Traditional or Roth IRAs as well.

If you are a 1099 employee or a sole proprietor of a business you can use that income to fund a SEP IRA.

You can put away 20% of your self-employed income. Which will be tax-deferred.

You can make your contributions weekly, monthly or in a lump sum. You have until tax filing day to make your contributions for the previous year.

With the SEP IRA, you are able to invest it in anything you like. Stocks, bonds, mutual funds, ETFs, and so on. Really limitless potential.

The SEP IRA can be opened at any brokerage house of your choosing.

3. I want to setup a SEP IRA to save more for retirement-what is required?

Setting up a SEP IRA if you are self-employed is fairly easy, but it becomes a little more tricky if you have employees as all the employees have to be enrolled in the plan.

3 steps to set up a SEP IRA

 Execute a written agreement to provide benefits to all employees

Give employees certain information about agreement

Setup IRA accounts for each employee

The written agreement must include employer name, the requirements for employee participation, the signature of a responsible official and a definite allocation formula.

You must provide to your employees the following.

  • notice that you have adopted the SEP
  • requirements for receiving an allocation
  • the basis upon which the employer allocation will be allocated

A SEP IRA must be setup or by each eligible employee. They may be setup by banks, insurance companies, or other qualified financial institutions.

All contributions must go to a traditional IRA. Employees are responsible for making decisions about their own investments in the SEP IRA account.

A great resource for the details of these plans is irs.gov

If you are still unsure you can consult your CPA or work with brokerage institutions like Fidelity or Vanguard, who specialize in these accounts. They will be happy to help you set these up because they want your business.

4. What is required of your personal company when setting up a SEP IRA?

Very simple. You need to be self-employed. Next, you need to create the required document and make the contribution before your companies tax filing date.

That’s it. Very simple to run and operate. However, if you take on more employees it can get a little more complicated. At which time it may be a better idea to look into setting up a 401k for your employees.

All brokerage firms will open a SEP for you and provide you with the needed documents.

5. Is it possible to have both a Roth IRA and a SEP IRA?

The answer is yes. The SEP IRA does not block your contributions to a Roth IRA. So your contribution limit will be $5500 for the year per the current regulations. However, there is always

However, there is always a, however, isn’t there? You will need to keep in mind your salary restrictions. Keep in mind that a Roth IRA does have salary restrictions or AGI. Which stands for Adjusted Gross Income.

As you salary increases you will have to phase out the Roth IRA contributions. And at some point, you will not be able to contribute to a Roth.

6. Is it possible to have both a Traditional IRA and a SEP IRA?

Technically yes, but you would have to look at how the contributions are made.

With the SEP you have to look at two parts. How much is contributed by the employer and how much is contributed by the employee.

The first is limited by the amount contributed by the employer based on the formula that is stated in the plan. The second would be limited by what has already been contributed by the employee.

So if you contribute $4000 for the year into your SEP you would only be able to contribute $1500 to your Traditional IRA. As the current limits are $5500 for the tax year.

You would be better served to open a Roth IRA which would allow you to contribute more depending on your salary level.

7. What is the formula to calculate the maximum contribution for a SEP IRA?

An employer may contribute up to 25% of the employee’s salary, provided the contribution doesn’t go above $53,000. The employee’s compensation is capped at $255,000. At this point, the employee’s contribution would be capped. A chart below to help illustrate the point.

 

 

 

 

8. What are the contribution limits for a SEP IRA?

Pretty simple and straight forward.

25% of the employee’s compensation for the year.

$53,000

Unlike other retirement accounts, there are no catchup limits for the SEP IRA.

So pretty simple huh?

9. What is the difference between a Traditional IRA, SEP IRA, and solo 401k besides contribution limits?

With both the Traditional and SEP IRA contributions are before-tax vehicles, which lessens your tax burden. They both offer unlimited investment choices as you are in charge of the deciding which investments you want to choose.

One difference between the SEP IRA from the other two is that there is an employer contribution element that is not included in the other two vehicles. This greatly increases your investment dollars.

Both the Traditional and Solo 401k are accounts that need to be setup by the individual which means a little more work on your part. With the Traditional it is a simple as opening a brokerage or bank account and deciding which investments you want to choose.

With the Solo 401k, you are involved in opening the accounts which can be a little more tricky. Plus there are much higher fees involved than the other two accounts.

Another difference between the plans is that the SEP IRA and solo 401k are only for those individuals that are self-employed, whereas the Traditional is a plan that anyone with earned income can open.

10. Can I rollover my SEP IRA?

Yes, you can rollover your SEP IRA at any time. If you roll it into a Traditional IRA which is considered a like to like transfer there will be no tax consequences to the transfer and it is free to do so.

If you roll it into a Roth IRA there will be tax consequences at the time of the rollover. So unless you want Uncle Sam taking his cut earlier and more expensively, this is something you want to definitely consult a tax advisor with before doing so.

Conclusion

So that sums up some of the questions that I had about SEP IRAs. As well as some that I encountered doing research for this article.

I will be honest in that this was a subject I was not as familiar with. I work with the Traditional and Roth on a daily basis. But the SEP IRA was familiar in name but not in how the plan actually works.

I have to say that this was very educational for me and I hope was of benefit for you.

The SEP IRA has a lot of the same characteristics of the Traditional IRA in that it is a before tax contribution. It also has the advantage of having employer contributions. Plus you have a wealth of investment opportunities as you would with a Traditional as well.

This is a great plan for anyone who is self-employed and is looking to start a retirement plan for themselves or their company. It is very easy to setup and it provides additional benefits to your employees, which will help in the retention of your employees.

A few experts that I came across in my research for this article. First would be Ed Slott who is considered one of the foremost experts on all things retirement. He has a great website which has oodles of information on just about anything related to retirement. Check it out.

Another would be Roger Whitney, who has a great website too. He is a great resource for many, many things about retirement. He has a great podcast that he puts out weekly that has tons of great advice and tips. And he speaks in plain-English, which makes it very easy to listen too. He also has a weekly newsletter that he sends out each Saturday with all kinds of great retirement tips.

So what questions do have about SEP IRAs? L.et me know in the comments and I will do my best to answer them.

This wraps up this week’s episode and as always, thank you for taking the time to read this article and take care.

 

 

 

 

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