Types of IRA’s: SEP Explained

SEP’s & SIMPLE’s are very similar in nature. Both IRA’s are designed for those who are self-employed and/or small business owners. It’s vital for small businesses to offer their employee’s retirement plans as they serve as an incentive for both employee recruitment and retention while potentially increasing productivity. Please keep in mind both IRA’s are associated with many more rules and regulations outside of the scope of this text. Please consultant your tax advisor before making any financial decisions. Below is a brief overview of how SEP’s work.

• SEP: Many people aren’t aware of how Simplified Employee Pensions (SEP) work and miss out on the opportunity to increase their retirement funds. In a SEP account, one can make 2 types of contributions, one as an employer (if applicable) and another as an employee. What does this mean? Well if you are the owner of a company, you are also an employee of the company, thus you can make a contribution to your SEP as an employee and another as an employer. This allows you to save for retirement at a much faster pace! However, as there are contribution limits for Traditional & Roth IRA’s, the same goes for SEP’s. With a SEP, as an employee, there is a contribution limit of $5k a year. As an employer, the limit is 25% of total income, up to $49k. SEP’s allow small business owners to provide their employees with a retirement plan, while also benefiting from a tax deduction for contributions made to their employee’s accounts. Thus contributions can be made by the employer and/or the employee. Another great benefit for employees is that all contributions are immediately 100% vested, meaning there aren’t any time constraints, such as being an employee for a set amount of years.