SEP IRA: The Retirement Account Especially for the Self-Employed

Since the beginning of 2017, the number of self-employed individuals in the United States has expanded greatly. According to a study by MBO Partners of Herndon, VA from July 2017, the self-employed population increased to 40.8 million individuals and represented 31% of the working population. Here in Carteret County and nationally, this trend is expected to continue. As the self-employed continue to grow their business and income, many will also begin to think about ways to fund their future retirement. If you are self-employed, have freelance income or a small business owner, a SEP IRA (Simplified Employee Pension) could be appropriate for you. A SEP IRA is a Traditional IRA specifically designed for these individuals. Contributions are made by the business into an IRA held in the self-employed individuals' name or the employee’s name. For an employee to receive this benefit, he/she must be at least 21 years old and has been an employee for 3 of the last 5 years. Contributions are considered tax-deductible to the business.

When it comes to making contributions to a SEP IRA, there are several important points that employers and employees need to know. First, employer contributions are not discretionary and cannot discriminate against highly compensated employees.  An employer can exclude employees with earnings under $600 and non-resident aliens with no source of U.S. income.  Contribution limits for 2018 are 25% of a participants pay or $55,000, whichever is less. If you are a self-employed individual, contributions are based on your self-employment income minus 50% of any self-employment taxes that have been paid. The deadline for establishing and contributing to a SEP is the employer tax filing deadline including extensions. Since SEP is a Traditional IRA, an employee may elect to make a separate contribution in their own name as well.  The Individual Contribution Limit for 2018 is $5500 plus an additional $1000 catch-up contribution for individuals who are age 50 years and older.  All contributions are immediately vested at 100% and the employee directs how they are invested. Finally, the employer does not have to make ongoing contributions.  

A SEP IRA is a great way for the self-employed individual to save for retirement as well as the small business to reward/retain its employees.  The plan requires minimal paperwork and tax filing documentation. Before establishing a plan, it is important to discuss the IRS regulations governing a SEP with a tax professional.  After speaking with a tax professional, an advisor can establish the SEP and recommend the appropriate investments. 

Matt Dressel is the Owner of the Independent Financial Solutions Group, a Registered Investment Advisor.  He is an Investment Advisor, Life Insurance Agent and does Financial Planning.  If you have any questions about this article, he can be reached at 252-515-0242 or matthewdressel.ifsg@gmail.com.