The SEP IRA is a retirement plan that was created to be beneficial to self-employed persons and business owners. SEP stands for Simplified Employee Pension plan, and it really is quite simplified compared to other types of retirement accounts. Here are the basics of SEP IRAs and why you might want to consider one.

Eligibility

In order to be eligible for this type of plan, you will have to fall into one of a few different categories. As it is designed mainly for self-employed people, you have to have some sort of a self-employment arrangement. For example, you could be the sole proprietor of a business. You could also be involved in a partnership. In fact, you can start one of these accounts if you have any kind of self-employment income. Even if you have a retirement account with your employer, you can start one of these accounts if you make money from self-employment.

Contributions

One of the great things about this plan is that you can contribute more money each year than you could with other types of plans. With this plan, you can contribute as much as 25 percent of your income up to a maximum of $49,000. By comparison, you can contribute only $5000 annually to an IRA. Therefore, this presents you with a way to save quite a bit more money than you otherwise would be able to for retirement. If you are a business owner and your spouse is involved in the business, he or she can set up his or her own retirement account and contribute as well. Therefore, a married couple could potentially put away quite a bit of money every year into this type of account.

If you are a business owner, you will be making all of the contributions for your employees. You also have to contribute an even percentage of each employee's income. Therefore, if you are going to contribute 10 percent of one person's income to the plan, you have to contribute 10 percent to everyone else's plan, based on his or her income.

You can also change the percentage that you contribute from year to year, based on your own discretion. As long as you choose a percentage between 0 and 25 percent, you can contribute whatever you want to contribute for the year.

Advantages of SEP IRA

  • Simplicity--The SEP IRA is really designed to be much simpler than other retirement accounts. You do not have any complicated paperwork to fill out or any documents to worry about. You do not even have to file a tax return document with the IRS each year. It is quite a bit easier to administrate than a 401k by comparison.
  • Recruitment benefit--When you offer a retirement plan such as this, it can present you with a nice benefit to offer potential employees. When they are trying to decide between one employer over the other, a retirement plan might make the difference for them.

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