Need A Simple Retirement Plan? Consider a SEP-IRA

Fischer Advisors
Apr 27
2 min read

Being self-employed comes with a unique set of challenges and opportunities. One aspect that often gets overlooked is planning for retirement. Without an employer-sponsored retirement plan, self-employed individuals must take the initiative to secure their financial future.

Fortunately, several retirement plan options are available that cater specifically to the needs of freelancers, entrepreneurs, and small business owners.

One of the most flexible retirement plans for the self-employed and small business owners is the Simplified Employee Pension Plan (SEP). SEPs provide retirement benefits for owners and employees (if any) without the high start-up and ongoing operating costs commonly found with traditional plans.

Let's see how they work:

A SEP plan allows employers to contribute to traditional IRAs (SEP-IRAs) set up for employees. A business of any size, even a self-employed one, can establish a SEP.
A business can establish a SEP even if the owner is the sole "employee." However, if there are other employees, the company must offer the plan to those at least 21 years old, employed by the business in three or more of the last five years, and earning at least $750 a year. Exclusions exist for employees covered by a collective bargaining agreement and resident aliens.
Employers are responsible for setting up SEP-IRAs for employees. The company must complete IRS Form 5305-SEP and give a copy to each employee along with a summary plan description.
Employers can contribute as much or as little as they want to each employee's SEP-IRA. There is a maximum, which usually changes each year. The current limit is 25% of an employee's salary, up to $69,000. That's much more than allowed in alternatives like SIMPLE IRAs and ordinary individual retirement accounts. For high-income individuals, it's hard to match what SEP-IRAs allow.
The employer can decide whether or not to contribute each year.
Investments in an SEP-IRA are not only tax-deferred but also immediately vested, providing a sense of security. Plus, employees make their own investment decisions, giving them financial control.

It's essential to keep in mind that SEP-IRAs are subject to the same parameters as any other traditional IRA:

Withdrawal of funds before age 59½ may be subject to penalty and taxes, except in certain circumstances.
SEP-IRA assets can be rolled into another IRA account.
Assets from another retirement account can be rolled into a SEP-IRA.
The required minimum distributions must be taken at the age of 72.

The right retirement plan can help your business grow and prosper by providing employees a powerful incentive to work hard and remain loyal. It can also help you, the owner, achieve your financial objectives.