Quick Overview of SEP-IRAs

photo credit: Manchester Library

Self-employed people are often a bit bamboozled over the whole IRA idea, but it’s not as hard as it sounds: the best way is to set up what’s known as a SEP-IRA, which stands for Simplified Employee Pension. Daniel Sorid recently wrote an overview which made the SEP-IRA process clear.

Who is a SEP-IRA for? The self-employed can have a SEP-IRA, and small business owners can also set up SEP-IRAs for their employees. It can be managed by a variety of providers, including banks, insurance companies and mutual funds.

How does a SEP-IRA work? You can choose what proportion of income to contribute to a SEP-IRA, up to 25%, and from year to year this can be changed. If you’re running a small business, the proportion has to be the same for everyone. All money contribute to SEP-IRAs is tax deductible.

Pros and cons of SEP-IRAs It’s low in paperwork and you change your contribution rate from year to year; most providers won’t charge any set-up fees. On the flip-side, in a small business, workers can’t make their own additional contributions, and you also can’t use a vesting schedule to provide an incentive for employees to stay working for you.

Tags: Banking | Retirement | savings | Self Employed | SERP IRA | Tax