Retirement Options: SEP IRA for Self Employed Professionals

By MBO Partners | May 25, 2020

Retirement Options SEP IRA for Self Employed Professionals

As a self-employed professional, you enjoy the flexibility, control, and creativity an independent career offers. However, the challenge and uncertainty of planning for retirement is a common concern. At a traditional job, you have the benefit of built-in retirement options, but this field can be more difficult to navigate on your own.

Fortunately, there are a number of solutions available. The right one for you will depend on a number of factors including your personal goals and income level, which you can discuss with a financial advisor. In this series, we’ll explore the retirement options available to independent contractors and provide you with what you need to know for a financially secure future.

What is an SEP IRA?

A Simplified Employee Pension (SEP) IRA is a type of traditional IRA that individual self-employed professionals or self-employed professionals with employees can use. SEP IRAs allow employers to set aside funds in IRA retirement accounts for themselves or for their employees. Contributions are tax-deductible and are held in the employee’s name.

Plans are easy to set up with a simple, one-page form. Then, business owners can open an SEP IRA account through a bank or other financial institution. For employees to be eligible for an SEP IRA, they must be 21 or older, have worked for the employer for 3 of the last 5 years, and have received at least $600 in compensation during the year.

What Are the Advantages of an SEP IRA?

An SEP IRA is easy to set up and operate, and does not have annual fees or setup costs. Flexible annual contributions are allowed, which means you don’t have to contribute each year. If your business has a tough financial year, you can choose not to contribute. On the other hand, if you have a great year, you can opt to make a larger contribution.

What Are the Disadvantages of an SEP IRA?

Only employers can contribute to SEP IRAs. Participants are limited to a $57,000 contribution limit or 25% of wages (for 2020), and no catch-up applies for older participants. While you do not have to contribute to an SEP IRA every year, when you do choose to do so you must contribute to your own SEP IRA as well as those of all eligible employees at an equal percentage, which can be costly. SEP IRAs are therefore ideal for self-employed professionals who have few or no employees and are looking for a flexible way to save for retirement.

Contribution Limits

  • SEP IRA contributions are limited annually to the smaller of $57,000 or 25% of total compensation.
  • Withdrawals are subject to the general limitations imposed on traditional IRAs, with additional tax applying if a participant makes a withdrawal before age 59 ½.
  • SEP IRA contributions and earnings can be rolled over tax-free to other IRAs and retirement plans.

SEP IRA Examples

Example 1: Employee of a small business

Amy, age 36, works for a small business and earns $48,000 annually. The maximum contribution her employer can make to her SEP-IRA is $12,000 (25% x $48,000).

Example 2: Self-employed business owner with no employees

Jacob, age 63, is a self-employed professional earning $200,000 annually. With an SEP IRA plan, his maximum possible contribution for 2020 is $50,000, the lesser amount being 25% x $200,000 ($50,000).

To learn more about retirement options for independent professionals, contact us today.

The information provided in the MBO Blog does not constitute legal, tax or financial advice. It does not take into account your particular circumstances, objectives, legal and financial situation or needs. Before acting on any information in the MBO Blog you should consider the appropriateness of the information for your situation in consultation with a professional advisor of your choosing.  


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